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Oil Leaps Higher As OPEC Pushes For 100% Compliance

OPEC sign

All OPEC producers that are part of the supply-cut deal are firmly determined to achieve a higher compliance rate than the 90-plus-percent compliance reported for January, OPEC’s Secretary General Mohammad Barkindo said in a speech in London on Tuesday.

Total OECD commercial oil stocks were already dropping in the last quarter of 2016, and the OPEC/non-OPEC production agreement is expected to further reduce those excessive stocks this year, Barkindo said.

“We will continue to focus on the level of inventory drawdown to bring the level closer to the five-year industry average,” OPEC’s official noted.

In the short term, the OPEC/non-OPEC cooperation is expected to speed up the rebalancing of the oil market, Barkindo said.

The cartel’s chief also drew attention to the fact that the oil price crash has dramatically reduced investments in global oil and gas exploration and production, with spending dropping by 26 percent in 2015 and another 22 percent last year, for a combined drop equal to above US$300 billion. The industry cannot afford to see investment drop for a third consecutive year, Barkindo noted.

Although initial official figures by the International Energy Agency (IEA) and OPEC itself show that the cartel’s early compliance to cuts was very high - more than 90 percent – in January, a lot of analysts and observers are not as optimistic on compliance as we go forward to the spring and summer. Many expect compliance to slip and OPEC members to start producing more, tempted by the current oil prices and expected higher demand with the summer approaching.

Although compliance was 90 percent and higher in January, it was almost solely due to Saudi Arabia and a couple of its closest Gulf Arab allies.

Even with the pledged cuts by OPEC and 11 non-OPEC nations, the initial period of the deal until June may not be enough to draw down the global oversupply. Reports emerged last week that OPEC appears to be prepared to extend the production-cut agreement and also increase the cuts, if inventories fail to drop to a specified level.

By Tsvetana Paraskova for Oilprice.com

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