WTI (NYSEARCA:USO) finished the week up 0.5%.
It was another relatively quiet week in the oil markets. The year started off with WTI reaching over $55 before ending the day below $52.50. Most of the sell-off on Jan. 3 recovered over the coming week as news reports came out indicating OPEC members will comply with the OPEC agreement.
According to the WSJ, Saudi Arabia has already reduced crude output by 486k b/d to 10.058 million b/d. Other OPEC countries including Kuwait, Iraq, UAE, and Venezuela have all announced their proportional production cut. Kuwait even hinted at possibly lowering oil production more than the stated quota, although we believe that was rhetoric to boost sentiment rather than the actual intent.
Despite net-long positions remaining near all-time highs, the early indications of OPEC following through on the OPEC agreement has the skeptics questioning whether this time is different. Historically, OPEC compliance during production cut agreements has only been about 70%, but based on #OOTT tanker traffic, the figure is more around 85% compliance. We know looking at shipping volume data that Saudi, UAE, and Kuwait will follow through on their production cuts which equals to 700k b/d, and Venezuela's volume is already slipping whether they are voluntarily reducing production or not making the total cut 800k b/d. Nigeria oil production was hit hard in December falling 200k b/d, bringing total oil production to 1.45 million b/d, and another fire this week has Shell (RDS.A) (RDS.B) shutting down another 180k b/d of production.
Libya is the only country so far that has increased oil production meaningfully over the last two months, bringing oil production up from 530k b/d to 690k b/d. The increase in Libya has largely been offset by the declines seen in Nigeria.
Iran, on the other hand, has not been successful in bringing up oil production above 3.7 million b/d. As a matter of fact, excluding Iran's floating storage sale of 13 million bbls since late October, Iran's export volumes have declined since November, leading us to believe that Iran temporarily boosted oil production ahead of the OPEC meeting in order to seal a better deal. Our analysis points to flat oil production out of Iran over the next 6 months.
On the non-OPEC front, Russia's export figures remain a black box at the moment and there aren't enough physical flow data to pinpoint where oil production is heading. December data imply total production volume of 10.8 million b/d and in stark contrast to the self-reported 11.2 million b/d. Mexico's Pemex is already starting to see production decline kicking in, and other non-OPEC countries will also gradually see production decline over the coming months.
The theme for the oil markets for 2017 remains largely unchanged with fundamentals set to shift swiftly to the bulls' camp. In our 2017 oil markets outlook to premium subscribers, we detailed the case for $70 oil in Q3 2017, and why the consensus is off. OPEC compliance will just be part of the story for the first half of 2017, and non-OPEC production decline will also change sentiment. If you are interested in reading our report, you can sign up here.
