Now, for the Organization of Petroleum Exporting Countries, comes the hard part.
This is not to suggest that securing an agreement to cut members' oil production by an officially reported total of 1.2 million b/d, was easy. Before the group's anxiously awaited Nov. 30 meeting in Vienna, negotiations among members and co-opted nonmembers were intense. Oil traders, aware of the difficulty of fashioning an agreement, rewarded the outcome with a spurt in the price of crude.
Needed a deal
OPEC's most influential members knew they needed a deal. Market anticipation was so intense that failure to produce one would have pushed oil prices below levels now painful to all OPEC members-but unifying. And a meeting that ended in fruitless acrimony, like that of June 2011 when the market needed more crude from OPEC, would have been catastrophic. Market participants crave assurance that OPEC can and will manage supply when members become desperate enough to seek production restraint. Since November 2014, the group has shunned the role.
In Vienna, moreover, it did not simply freeze output, as some members had suggested. That expediency would have enabled it to herald a new production agreement, which might have calmed the market but affected crude prices only momentarily. The market needs lower production. The Vienna agreement calls for precisely that.
By itself, OPEC production at the new target rate, 32.5 million b/d, would move the oil market toward balance. Group leaders recognize the need to lower global inventories, which remain too high by recent standards and destined to stay high as long as the supply rate exceeds demand. The imbalance has been shrinking lately, but OPEC wants to hasten the arrival of the point at which additions to stocks become withdrawals and inventories begin to shrink.
According to November balance projections for 2017 by OPEC, the International Energy Agency, and the US Energy Information Administration, annual average OPEC crude production at the target level would produce an average annual inventory decline. Projections of supply, demand, and other elements of balance calculations vary among the agencies, so calculated rates differ, too. IEA's projections yield the largest inventory withdrawal net of other balancing items: 800,000 b/d. OPEC's numbers suggest the smallest rate, 200,000 b/d, and EIA's implied withdrawal level is 250,000 b/d.
The oil market, of course, is huge and complex. It would be difficult to predict even if it were not susceptible to shocks from weather, war, and economic surprise. Inventory withdrawals at the IEA and EIA rates easily could revert to price-weakening additions of equal or greater scale. And with withdrawals at 250,000 b/d, eliminating the gap between recent crude and product inventories and 2011-15 average stocks of countries represented by the Organization for Economic Cooperation and Development-roughly 950 million bbl-would take 10 years.
To support prices above recent levels, the market doesn't need stocks to drop that much. It does need solid progress in that direction. To solidify its own effort OPEC has sought help. The group said it has reached "understanding" with non-OPEC producers for production cuts totaling 600,000 b/d. Half of that would come from Russia. The supplemental cuts obviously would accelerate the rebalancing OPEC seeks and the market needs. They'd also help counter the market's new wild card: the amount by which producers in tight-oil plays increase production by drilling and completing wells in response to price gains.
The hard part
Against 2017 market conditions as currently foreseen, the agreement looks effective. But the hard part about OPEC agreements is enforcement. And the extent to which OPEC supply discipline depends on non-OPEC cooperation, elusive when tried before, is unclear. Will OPEC members abandon the deal if Russia doesn't deliver its 300,000 b/d of cuts? And how will Russian production restraint be apportioned among companies that answer to shareholders as well as Moscow?
The agreement takes effect Jan. 1 and lasts 6 months. By about March, production numbers will tell how it's working.