LAUNCESTON, Australia (Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)
The trick with the OPEC agreement is not to view it as a cut to output, but rather as the partial removal of excess crude oil from the global market.
While there is little doubt that OPEC’s agreement to remove 1.2 million barrels per day (bpd) will tighten the global oil market, there is still likely to be plenty of crude around in the first half of next year.
This will likely be the case even if Russia and other non-OPEC producers make good on a commitment to cut production by a further 600,000 bpd.
Certainly, initial market reaction suggests that investors are expecting a substantial tightening of the supply-demand balance, with U.S. West Texas Intermediate crude futures settling up $4.21 at $49.44 a barrel, a 9.6 percent gain.
They earlier rose 10 percent, the largest one-day move since February, as OPEC announced its first deal to cut output since 2008, after oil prices plummeted from record highs in the wake of the global financial crisis and recession.
On the face of it, the oil price is responding to what seems like a rather large cut to global oil supplies, and this is exactly what the OPEC ministers would wanted to have achieved.
But drill a little further down into the details and it’s possible to question the size, and therefore the ultimate influence, of the OPEC announcement.
The main problem is that the cuts announced in Vienna, to take effect from January, are based on what the various OPEC countries were producing in October, a time when their combined output was at a record high.
Saudi Arabia, the group’s dominant producer, is to shoulder the bulk of the 1.2 million bpd reduction, cutting its output by 486,000 bpd to 10.058 million bpd.
However, that 10.058 million bpd figure is only marginally lower than the 10.25 million bpd Saudi Arabia produced in January this year, meaning that if the kingdom does cut its output as planned, it will still be producing more or less what it was a year earlier.
One of the surprises from Wednesday’s agreement was that Iraq agreed to cut its output by 210,000 bpd to 4.351 million bpd.
However, this is still more than the 4.25 million bpd it produced in January this year, meaning on a year-on-year basis it will be producing more, even after agreeing to cut output.
Iran secured a deal that it can actually produce more from January that it was doing in October, with its quota lifted by 90,000 bpd to 3.797 million bpd.
This is almost 1 million bpd higher than the 3.05 million bpd the Islamic republic produced in January this year, a figure that puts the 1.2 million barrel per day cut announced on Wednesday in sharp perspective.
Other major Gulf producers also see only marginal drops in their quotas for January 2017 compared to their production in January this year.
Kuwait will be allowed 2.707 million bpd, down from January’s output of 2.8 million bpd, while the United Arab Emirates has a quota of 2.874 million bpd, down fractionally from January’s production of 2.89 million bpd.
Overall, OPEC produced about 33.82 million bpd in October this year, the month used as the base for the announced cuts.
Taking away 1.2 million bpd results in output of around 32.6 million bpd, which is exactly the amount the group produced in January this year.
Russia has pledged to participate in the OPEC action, the first time they have acted jointly since 2001, but it wasn’t immediately clear from what level the world’s top oil producer would cut.
If one assumes Russia uses October as a base, then a 300,000 bpd cut would take its output down from a post-Soviet high of 11.2 million bpd to 10.9 million bpd.
This is above the 10.88 million bpd Russia produced in January this year.
Effectively, what OPEC and Russia are planning is to take their joint output back to the level that prevailed in January this year, begging the question as to whether this will indeed be enough to spark a sustained rally in prices.
Leaving aside concerns about compliance, it would still seem a tough ask for the announced cuts to tilt the supply-demand balance firmly toward the supply side of the equation.
Other producers not party to the agreement, particularly those in the United States and Canada, will be quick to respond to any rally in prices by upping their output.
Additionally, if the market structure does shift more toward backwardation, where oil for future delivery is cheaper than near-dated oil, it’s likely that some of the millions of barrels currently in storage will make their way on the market.
Furthermore, if prices do sustain the current rally, it’s also likely that China, and to a lesser extent India, will ease off buying oil for strategic storage, thereby weakening demand growth in Asia’s top two importing nations.
What OPEC may well end up achieving is a price floor for crude oil, along with market realization that the group is still relevant.
Editing by Richard Pullin