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OPEC set to cut production in 2017

Posted by PortVision on Jan 24, 2017 6:07:00 AM

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In an effort to decrease oil inventories, OPEC nations as well as other oil-rich countries, agreed at the end of November to cut their production of oil. As reported in BloombergMarkets, this is the first such cut since 2008. Saudi Arabia, Iran, Iraq, Kuwait and Russia signed on to the agreement of the Organization of Petroleum Exporting Countries (OPEC); Nigeria and Libya were exempt and Indonesia was granted a freeze of its membership. The price of oil immediately rose on the production cut news.

The signers will reduce their oil output beginning in January 2017 by 1.2 million barrels per day (bpd). This will decrease overall production to 32.5 million barrels. OPEC nations brought in a record $920 billion in 2012. In 2014, before the price of crude crashed, earnings were down to $753 billion. In 2016, earnings expectations fell to only $341 billion from oil exports.

Saudi, UAE and Kuwait crude will be cut 486,000 bpd, 139,000 bpd, and 131,000 bpd, respectively. 75% of their output has been shipped into Asia; half to East Asia (i.e., Japan, China, and South Korea), and the remainder has been exported to Southeast Asia, South Asia and North America (basically, the US), according to Oilprice.com.

The hope is that with this production cut, OPEC and other producers will draw down the oversupply by the third quarter of 2017. Oilprice.com points out that this is dependent upon all players complying with the deal, something that does not always occur. Saudi Arabia and its Gulf Arab allies have agreed to implement their cuts right away; other producers will cut gradually. This may result in some producers deferring action if they see that prices remain high.

The production cuts were set to last for six months, and OPEC will meet again on May 25 to determine if these numbers will be extended. It also remains to be seen how these cuts will affect the overall global shipping of crude.

The storage of oil in offshore supertankers has become commonplace due to the oversupply that this production cut addresses. Oil inventory has filled most onshore tank storage and floating storage has been a feature of the marketplace for more than a year. Bloomberg reported in 2015 that the most oil in 80 years is now in storage. The cut in OPEC's production numbers may free up a number of these tankers now being used for storage.

Topics: CrudeOil, oil, Drilling, Shipping