OPEC members mainly complying with output-cut deal

Posted February 16, 2017

To the surprise of many, the OPEC and NOPEC deal is not only holding but overperforming. Although OPEC is boasting a 90 percent plus compliance level, the same can not be said about the other non-OPEC members who are also involved in the deal. "Asia is being barraged with higher volumes from Saudi Arabia as they cut volumes to the slow-demand-growth west in order to not lose their grasp on the epicenter of demand growth in the east". As on January 2017, Russian Federation had only reduced 117,000 barrels per day- which was well below its compliance level.

The cutback by OPEC, and the fact that prices have stabilized in the $50s per barrel, has given rise to a jump in US shale production. There is a catch however, of-late the market is basically focusing on two things, short-term movements and supply. Demand also rises sharply in the Middle East as the summer heat drives up demand for electricity for air conditioning. It was certainly bullish but with a flash of caution. The iShares MSCI Saudi Arabia Capped exchange-traded fund (KSA) is higher by almost 1% today and this week. "Lower production was partly offset by higher flows from Libya and Nigeria, which are exempt from cuts". This is due to three main factors. First, and most importantly, U.S. Shale.

Members of the Organization of the Petroleum Exporting Countries are sticking to their agreement to curb oil output, but prices for crude have lost ground so far this year thanks to signs of further growth in USA output.

USA oil drillers over the past month have added the most drilling rigs since 2012, bringing the total count to 591 rigs, the highest since October 2015, Baker Hughes said in its weekly report.

The Permian is touted for its relatively good quality oil, significant amount of existing infrastructure and established personnel, along with its proximity to major refineries and export terminals in the U.S. Gulf Coast. That put the USA benchmark back into negative territory for the year to date, down 1.5%.

So far, "traders have been surprised by larger January OPEC output cuts than initially expected", said Tyler Richey, co-editor of The 7:00's Report.

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US bank Citi said that it was lowering its 2Q 2018 and 4Q 2018 oil price forecasts by $1 a barrel. Shares of Brazil's state-controlled oil company has been the strongest emerging market energy stock performer on the week: Petroleo Brasileiro or Petrobras (PBR) with a rise of 5%. In another article No Refuge for Oil the writer explains the above situation as: What, then, is the panacea?

Shum also predicted that OPEC will probably extend the six month deal if prices remain near or above current levels; however, if prices falter, "all bets are off" and exporters will start pumping normally in an attempt to boost government revenues.

Economists are looking for CPI growth of 0.3 percent, unchanged from the prior month.

Gold prices fell as the US Dollar rose alongside Treasury bond yields and the projected 2017 rate hike path implied in Fed Funds futures steepened, undermining the appeal of non-interest-bearing and anti-fiat assets.

It certainly is a test of patience. Patience for demand to once again step in.