Will The OPEC/Non-OPEC Deal Be Extended Beyond 6 Months?

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Includes: BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Gaurav Agnihotri

Summary

Oil prices have formed a pattern of rising up slightly and then again falling back to its initial levels.

OPEC members – Libya and Nigeria to increase their output in near future.

A weak oil demand and rising U.S oil production is putting a lot of pressure on oil prices.

In last few weeks, oil prices have formed a pattern of rising up slightly and then again falling back to its initial levels. Prices have become range bound. Although OPEC has managed to achieve a 90 percent plus compliance levels towards its production cuts, an increase in U.S oil production and stockpiles have kept prices under constant pressure. At the time of writing this article, the WTI and Brent were trading at $53.86 and $56.39 respectively. Although Saudi Arabia (which has reduced more than its allocated production quota) has stated that the current OPEC-non OPEC oil deal need not be extended beyond a period of six months, an extension of this deal may be imminent in my opinion. "What it (OPEC and non-OPEC cut) does is basically avoid an even worse surplus than what has been the case in 2015 and the first half of 2016. But it does not eliminate (the surplus) in the first half of the year," said David Wech of JBC Energy.

OPEC members - Libya and Nigeria to increase output

Investors must note that OPEC members, Libya and Nigeria (who are exempt from production cuts), may very well increase their oil production in near future. Speaking of Libya, the country's crude oil production has gone beyond 700,000 barrels per day and is expected to increase even further as working conditions improve. Libya aims to increase its production to around 1.2 million barrels per day by August 2017 and 1.7 million barrels per day by March 2018. Looking at the current situation, Libya may very well achieve its target. "Eni and Total (NYSE:TOT) are working there with no problems, so the situation is improving every day in Libya and I'd like to take this opportunity as an introduction for those who have interest to work in Libya. More than 45 percent of the land is still virgin, hasn't been explored, so we still have large areas that haven't been discovered, so the opportunity is there," said Jadalla Alaokali from Libya's National Oil Corp in an interview. Even Nigeria, which increased its oil production by 101,800 barrels per day last month, may very well continue to raise its production levels in the coming months. In my opinion, a possibility of substantial increase in supply from Libya and Nigeria will have a considerable impact on oil prices and even on the OPEC oil deal. In short, it will be challenging for OPEC to maintain a high compliance level in the coming few months.

Takeaway for investors

Although OPEC is supporting oil prices by maintaining a high compliance level, a weak oil demand and rising U.S oil production is putting more pressure on oil prices. Speaking of U.S oil production, award winning oil expert - Daniel Yergin expects that U.S-based oil drillers will increase their output by more than 500,000 barrels per day in 2017. "A dollar invested in 2017 produces about two and a half times as much oil as a dollar invested in 2014, so I think even at these lower prices we're going to see this recovery," said Daniel Yergin. OPEC's undisputed leader, Saudi Arabia, is currently denying that it needs to extend its oil deal beyond six months, but it has left itself with little choice. Investors must note that Saudi Arabia dominated-OPEC and Russia need to stick to their commitment towards the oil deal, as they require oil prices (NYSEARCA:USO) (NYSE:DBO) (NYSEARCA:OIL) (NYSEARCA:BNO) to remain above $50 per barrel in 2017. And looking at the current situation, this is only possible if the OPEC-non OPEC deal is extended beyond six months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.