Is Non-OPEC Production Compliance Really 60%? Oil Markets Daily

by: HFIR


Non-OPEC production has so far not reached its end of the bargain.

We estimate non-OPEC production cut at 260k b/d.

However, non-OPEC production ex-Russia should continue to decline beyond the OPEC deal which should be positive for oil prices in the long run.

OPEC's technical committee announced that OPEC compliance is at 90%-plus and non-OPEC compliance is near 60%.

We are oil bulls, but we are doubting the 60% non-OPEC compliance figure. In addition, OPEC's compliance of 90% seems faulty as well. Unless the technical committee has production estimates that we have not seen elsewhere, it is unlikely that the current compliance to the OPEC/non-OPEC deal is that high.

Here's where we see OPEC's oil production:

OPEC countries have reduced production by 800k b/d as of our latest estimate. A 90% compliance rate implies a cut of 1.08 million b/d. Although our estimate is just 208k b/d lower and could be subject to forecasting errors, we are not seeing the implied stock draw as we had originally expected to see.

For the non-OPEC deal, Russia has agreed to take on a bulk of the supply cuts at 300k b/d. However, our preliminary figure shows compliance at 180k b/d or exactly 60% compliance. To reach 60% compliance, we need to see Mexico, Azerbaijan, Kazakhstan, Brazil and other countries step up to meet the deal. While it's understandable that the non-OPEC countries excluding Russia do not possess the capability to immediately shut off production, the gradual decline we've seen from these other countries have only amounted to 80k b/d.

Combining this with Russia's production cut gets us only 260k b/d or 100k b/d short of where the OPEC technical committee sees production at. This is also short of the 600k b/d targeted production cut by the non-OPEC countries.

However, the bullish takeaway we have forecasted is that despite the non-OPEC countries ex-Russia not meeting up to their end of the bargain, their oil (NYSEARCA:USO) production will continue to decline beyond May 2017. The lack of capex investment in their aging oil fields have recently accelerated decline rates, and we do not forecast them to be able to replace that in the years ahead.

Although the lack of production cuts from non-OPEC countries signal a bearish short-term development, we think the longer-term implication of a gradual decline in non-OPEC ex-Russia production is positive and bullish for oil prices.

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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.