As Good As It Gets

Oil's Promised Land Slips Away on OPEC Leaks

Iran and Iraq keep pumping while Trump forebodes a shale gale.

It's just one month into OPEC's deal to cut production, and this could be as good as it gets for the group's attempt to rebalance the market. Rising output from those not included in the accord and from the U.S. is already undermining the effectiveness of the deal. The prospect for this leakage to worsen means we may now be seeing the beginning of the end of the march upward in prices. 

When 10 OPEC members agreed on Nov. 30 to cut their combined output by around 1.2 million barrels a day, that target included an exception for Libya, Nigeria and Iran.

So far those ten countries have mostly taken much bigger steps towards meeting their obligations than most analysts thought possible. Saudi Arabia has cut output by even more than it pledged -- perhaps reflecting much lower domestic demand as gas supply increased and temperatures fell from summer highs. The outlier in this is Iraq, which has cut supply by only around a quarter of the amount it agreed to.

Walking the Walk

Most OPEC members have made big steps in implementing agreed output cuts

Sources: Bloomberg, OPEC

The effectiveness of these cuts in rebalancing the oil market is being undermined, though, both from within OPEC and outside. Rising supply from the three countries excused from the agreement is offsetting the cuts made by the rest, reducing the size of the overall reduction in OPEC output to little more than 800,000 barrels a day 

In the coming months compliance from the ten countries bound by the deal might get a bit better than it was in January, but probably not by much. It is difficult to see Saudi Arabia being prepared to keep production below 10 million barrels a day -- once domestic consumption begins its seasonal climb towards its summer peak, output will have to rise in order to maintain exports, which is where they make their money. Iraq, already short of its target, is planning to raise exports from the south of the country this month to a near-record level.

Undermining OPEC's Action

Cut is reduced by partial implementation and rising output from Libya, Nigeria and Iran

Sources: Bloomberg, OPEC

NOTE: Output increases are measured from reported October production levels

If prices, which have already risen on the promise of cuts, stop increasing, producers may be less willing to toe the line in the coming months. History shows that, after an early burst of enthusiasm, compliance with OPEC output cuts typically wanes as time passes.

Add to this the prospect of further recovery in production from Libya and Nigeria and some small growth in Iran, and we may see total OPEC supply starting to creep back up.

Scant Reward

Oil prices jumped on the announcement of cuts, but have flat-lined since their implementation

Source: Bloomberg

That would probably undermine the willingness of the group's non-OPEC friends to fulfill their part of the bargain. Russian production fell by 117,000 barrels a day last month, putting it ahead of its own schedule to satisfy its agreement with OPEC, but that may not last if the group's compliance begins to slip.

An even bigger threat to market rebalancing is coming from outside the group. U.S. supply is rising rapidly and is already up more than 400,000 barrels a day since October, according to preliminary weekly data. That is not anywhere near as much as OPEC output has fallen over the same period, but it is still a work in progress.

Shale Gale 2.0

U.S. crude production may have risen by as much as 400,000 barrels a day since October

Sources: DOE, Bloomberg estimates

Monthly data for December and January are estimated based on average uplift from weekly figures over the last six months

While OPEC cuts diminish, the volume produced by the U.S. is likely to keep climbing -- and the pace is already faster than during the first shale gale of 2014-15. And that's before President Donald Trump acts on his America First Energy Plan, aimed at lowering energy costs and "freeing us from dependence on foreign oil."

That plan, whatever form it takes, is clearly intended to boost U.S. production even further. Will it be enough for rising U.S. output to entirely offset OPEC's output cut? Probably not, but the rebound in production from shale and from the Gulf of Mexico will continue to undermine OPEC's attempt to rebalance the oil market, making it difficult for prices to rise much beyond their current level.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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