(EnergyAsia, October 4 2016, Tuesday) — Crude oil prices rebounded to their highest levels in nearly two months following the Organisation of Petroleum Exporting Countries (OPEC)’s surprise announcement on September 28 that its members would cut production.

Brent crude surged more than US$4 a barrel over the next two days to end the month sitting above US$50 a barrel on news that the cartel would reduce output by around 750,000 b/d to 32.5 to 33 million b/d.
While the reduction represents less than 0.8% of global production, it was welcomed as an important first official attempt by the cartel to rein in supply since late 2008.
At the meeting in the Algerian city of Algiers, rivals Saudi Arabia and Iran seemed to have put set aside their differences to broker the cartel’s agreement for its first production cut in eight years. The extraordinary meeting was called amid oil producers’ growing panic over their dire financial situation in the face of the continuing global supply glut.
But analysts are not convinced the agreement will help the market maintain a recovery or that producers will exercise discipline to hold down supply.
Laying out the “massive challenges” that lie ahead, London-based DW Consulting said there was already dissension from Iraq’s delegation which said OPEC had significantly under-estimated its crude production by more than 300,000 b/d. Iraq said it produced 4.62 million b/d in August, well above the estimated 4.35 million b/d provided by OPEC.
This will negatively impact Iraq in the allocation of the new production quota.
“Secondly, the real numbers behind the output reduction are significantly larger than face value. Whilst OPEC is estimating its current production at 33.24 million b/d and is proposing to cut production to as low as 32.5 million b/d, the actual reduction is likely to be higher than the implied 724,000 b/d,” said DW.
According to the firm’s estimate, new capacities to be brought onstream in the 14 OPEC members by end-2017 including the expansions of Saudi Arabia’s Shaybah and the UAE’s Upper Zakum would boost their combined production to 33.62 million b/d.
“(It means) the alliance must dig much deeper than the reported numbers suggest,” said DW.
The firm predicts that the cartel will have to ‘hold back’ at least 1.5 million b/d of production by 2018 to meet the upper limits of its new quota of 32.5 to 33 million b/d.
Canada’s RBC Bank was just as skeptical. While the agreement appears bullish, the bank points to the continuing overhang of stockpile and the “prospective rapid response” of US shale oil producers to raise supply in the event of a sustained price recovery. There are also concerns about the world’s appetite for oil in view of slowing economic growth.
The bank concluded: “Expect more cuts. This is the 15th production cut since April 1998. History suggests OPEC will cut more than once.”
The Economist Intelligence Unit thinks the reduction will have limited impact on oil prices due to “the high risk that the deal will not be properly implemented, as happened with previous efforts to restrict supply.”
In a note, the EIU said Iraq, Libya and Nigeria, among others, will be motivated by any price surge to keep increasing production.
There’s also the lingering issue of global inventory overhang that will contain any surge in oil prices.
Adding to the gloom, the International Energy Agency (IEA) said global oil demand growth is slowing down while supply is little changed from last year.
The agency has lowered its September forecast for 2016’s global oil demand growth to 1.3 million b/d, down from 1.4 million b/d a month earlier. It expects demand growth to further ease to 1.2 million b/d in 2017.
The IEA said global supply eased off by just 300,000 b/d to 96.9 million in August. The production drop was insufficient to dent the overall supply glut and help market sentiments.
Meanwhile, the oil stockpile level in the developed world rose by 32.5 million barrels in July to reach yet another record high of 3.111 billion barrels. The IEA said oil consumption growth in the 35-member Organisation for Economic Co-operation and Development (OECD) remains weak.