OPEC and Non-OPEC Members Must Comply With Stated Production Cuts or Risk Lower Oil for Longer.....

The oil markets started 2017 with a bang on Tuesday morning with oil prices reaching an 18-month high, but quickly turned negative on dollar strength, and more importantly, news that Libyan and Russian production were up significantly in December. Specifically, Russian output in December is said to have held at record highs, while Libyan production is up to 685,000 bbl/d in recent days, more than double what it averaged in Q3 of last year. The extreme volatility in oil that has continued into the New Year, underscores the importance of OPEC and non-OPEC members sticking to agreed upon production cuts. Recall that OPEC member countries agreed to a production cut of 1.2 million bbl/d in December 2016 along with non-OPEC members (mainly Russia) agreeing to cut an additional 0.558 million bbl/d. With cuts expected to have been implemented on January 1, 2017, the market will be watching very closely for any signs of cheating by producers. Should certain countries not adhere to their new quotas, oil prices will likely remain in the $50 - $55 per barrel range for the foreseeable future.

Notably, the International Energy Agency (IEA) recently stated in their final report of 2016 that if OPEC and non-OPEC members stick to their new production quotas, the global surplus in oil will start disappearing in the first half of 2017. Prior to the agreement among producers, the IEA had suggested that the market would not re-balance until the end of 2017. Should OPEC and non-OPEC members adhere to their new production quotas, WTI will likely increase to north of $60 per barrel (positively impacting the balance sheets of all oil producing countries globally). With that said, one wonders why any OPEC or non-OPEC country would want to risk this positive outcome. The next few months will tell the story as to whether 2017 will see a further global recovery in oil or whether oil remains lower for longer.