Opec output cuts are in a "probation period" as the market tightens, IEA says

Courtney Goldsmith
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The IEA said it's too soon to tell whether compliance has been reached
The IEA said it's too soon to tell whether compliance has been reached (Source: Getty)

Demand for oil is rising while investors await news of whether Opec's agreed production cuts will take shape, the International Energy Agency (IEA) has said.

A report today by the IEA said the cuts agreed on by the Organisation of the Petroleum Exporting Countries (Opec) and 11 non-Opec producers are in a "probation period" as the market tightens.

Opec said it would cut oil production by 1.2m barrels per day (bpd) to 32.5m bpd for the first six months of 2017, and non-Opec countries like Russia and Mexico agreed to 558,000 bpd in cuts.

The IEA said it is "far too son" to tell what level of compliance has been reached. "The coming weeks will provide more clarity." Earlier this month, Opec said 50 per cent compliance with the cuts would be "acceptable" after Saudi Arabia said it had cut more than pledged.

Strong demand for oil in Europe caused the IEA to up its estimate for global oil demand growth to 1.5m bpd, but this year it expects it to fall back to 1.3m bpd.

This is still above the average rate of this century of 1.2m bpd.

Read more: Oil prices fell today after Opec said it won't deliver full output cuts

The agency to reduce its demand growth outlook for 2017 on the assumption the cost of crude would rise in 2017 and the possibility of a stronger US dollar.

"Attention is inevitably focused on the US shale oil patch where data shows the rig count increasing for six straight months to November after reaching its nadir in May 2016," the IEA said. The largest number of new rigs were added since April 2014 according to provisional data for December.

The IEA said Saudi Arabia’s oil minister has declared the output deal might not be extended beyond its six month expiry date.

"By saying that an extension was 'unlikely' he has issued a powerful reminder that if stocks are drawn in the first half of 2017 by the approximately 0.7m bpd... the market will have tightened and prices stabilised but not at a sufficiently high level to allow another bonanza for high-cost producers," the IEA said.

Mark Andrews, UK head of oil and gas at KPMG said much will hinge on the stability of oil prices. "However, with Opec already suggesting six months of production cuts may be sufficient, the supply side still has the potential to send oil prices, and sentiment, lower," he added.

"That said, the industry has learned lessons of the past and is better prepared. Price risk will be the principal focus when investing, lending, and allocating capital, with breakeven thresholds a critical element for all."

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