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OPEC Compliance Counters Weakening Oil Demand

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Saudi ups its cut to 135 percent of pledge; oil demand growth will slow to 1.4 MMBOPD: IEA

The IEA released its monthly Oil Market Report yesterday, outlining global supply and demand dynamics of the current oil market. After growing by 1.6 MMBOPD in 2016, global oil demand growth is expected to slow to 1.4 MMBOPD in 2017. According to the IEA, early indicators of slowdowns in Japan, Germany, South Korea and India support this prediction.

Global supplies rose by about 260 MBOPD in February, but are still 170 MBOPD below 2016 levels. While OPEC production levels are difficult to predict, due to the possibility of production cuts beyond mid-2017, non-OPEC output is expected to rise by 0.4 MMBOPD in 2017.

(Click to enlarge)

Source: IEA

Saudi Arabia cuts 135 percent of pledge

According to the IEA, OPEC has averaged a cut compliance rate of 98 percent over the first two months of the deal. This figure is skewed by Saudi Arabia, though, which has cut more production than it agreed to. The IEA states that Saudi Arabia’s current production levels mean it has cut 35 percent beyond expected levels.

While several non-OPEC countries also agreed to cut production, these cuts have been less successful. Russia has pledged more than half of the total non-OPEC reduction, but so far has only implemented about one third of the pledged reduction. In total, the IEA estimates that non-OPEC countries have cut production by 37 percent of their commitment.

The output cuts are not quite as effective as they might seem at first, though. Prior to the agreement, many countries increased production to record levels. This lessens the effect of any production cut, as the cuts are being made relative to the highest production levels in years. February production of 32.0 MMBOPD is still higher than the 2015 production, which averaged 31.5 MMBOPD. Related: Has OPEC Underestimated U.S. Shale Once Again?

Current production implies demand exceeding supply by 0.5 MMBOPD in early 2017

This should be enough to make a difference, though. According to the IEA, if current production levels are maintained through June, when the current output deal expires, there will be a market deficit of 0.5 MMBOPD in the first half of 2017.

Source: IEA

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  • Matthew Biddick on March 17 2017 said:
    Same ol', same ol' from the IEA concerning demand. Go back and look at their "estimates" from 2015 when they characterized demand as "weak" or "slowing". Early in 2015, right about this same time probably, that year's demand estimate was something around 1.2 mmbopd for demand growth. They later inched it up to 1.3, and then 1.4, and by the time we get to this year it's 2.0 mmbopd demand growth for 2015. No telling what that 1.6 mmbopd figure for 2016 will end up being.

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