Deepest Oil Cuts in World’s Top Market Didn’t Need OPEC Deal

  • Production from China expected to fall by 200,000 b/d in 2017
  • China cut more than level agreed by non-OPEC, excluding Russia

Is OPEC's Production Cut a Turning Point for Oil Prices?

Malaysia and Brunei are doing their bit for the global pact to rebalance oil markets, but the biggest production cuts in Asia are coming from a country that didn’t sign up.  

China, the world’s fifth-biggest producer last year, has reduced output by about 300,000 barrels a day this year, more than the combined cuts announced Saturday by non-OPEC countries, excluding Russia, as part of a deal coordinated with the producer group. The decline is expected to continue next year, with Chinese production shrinking as much as 200,000 barrels a day, according to consultant Energy Aspects Ltd.

“We’re seeing a natural decline in China oil production as fields are very mature and depletion rates are high,” said Virendra Chauhan, a Singapore-based oil analyst at industry consultant Energy Aspects Ltd. “The price level we had in last 12 to 18 months has incentivized imports over spending on domestic production.”

China’s output slumped as state-owned firms shut wells at mature fields that are too expensive to operate amid last year’s price crash. Production during the first 10 months of the year averaged about 4 million barrels a day, down about 7 percent from the same period last year, according to Bloomberg calculations based on National Bureau of Statistics data.

Malaysia and Brunei were the only Asian nations in the group of producers outside the Organization of Petroleum Exporting Countries that agreed to cut output by a combined 558,000 barrels a day starting Jan. 1. The region will use 32.88 million barrels a day of oil this year, accounting for more than a third of global consumption, according to data from the International Energy Agency. Daily demand is forecast to expand to 33.7 million barrels in 2017.

The deal, hammered out over the weekend in Vienna, is the first pact between the group and non-members in 15 years. While all individual country cuts are unclear, the non-OPEC reduction excluding Russia’s 300,000 barrels a day, as well as announced figures from Mexico, Oman and Azerbaijan, totals 83,000 barrels a day.

Morgan Stanley estimates Malaysia will reduce output by 20,000 barrels a day, while Brunei will lose 4,000 barrels a day. Both countries were celebrating holidays Monday and nobody responded to e-mails seeking comment sent to Brunei’s Energy and Industry Department, as well as Malaysia’s Ministry of Energy and state-run oil and gas company, Petroliam Nasional Bhd.

Oil prices surged as trading resumed Monday, rising as much as 6.6 percent in London to the highest intraday level since July 2015. Brent crude has climbed more than 20 percent since OPEC announced on Nov. 30 that it would cut production for the first time in eight years and was at $56.54 a barrel at 7:04 a.m. in New York.

“If all of these cuts are realized in the market, we could see prices potentially rise beyond $65 by May when the next OPEC meeting is convened,” said Sushant Gupta, director of Asia Pacific refining at Wood Mackenzie Ltd. in Singapore.

Output from Brunei, a country with a population of fewer than 500,000 people on the island of Borneo, peaked at 261,000 barrels a day in 1979, while Malaysia reached as high as 776,000 barrels a day in 2004, according to BP data. Wood Mackenzie estimates Brunei will pump 142,000 barrels a day this year and Malaysia at 664,000 barrels a day.

While the individual cuts are small, the combined reduction by OPEC and non-OPEC reductions could flip the oil market balance into deficit next year, according to Sanford C. Bernstein. The current surplus will slip into a 800,000 barrel a day deficit by the first half of 2017, Bernstein’s Neil Beveridge wrote in a research note Monday.

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