The next few weeks will give investors an insight into whether the production cuts by OPEC and non-OPEC will be fully carried out and will be a crucial period for prices of the commodity, according to a new monthly report by the IEA (International Energy Agency).
“For contractual and logistical reasons, we might initially see that the output cuts do not fall neatly into place,” the Paris-based organization said in the report Tuesday.
“The deal is for six months and we should allow time for it to be implemented before re-assessing our market outlook. Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices,” the IEA added.
After several meetings this year, OPEC countries decided to cut production by 1.2 million barrels a day starting in January. Non-OPEC members, such as Russia, joined the efforts earlier this month sending oil prices higher.
According to Neil Atkinson, head of the oil industry and markets division at the IEA, it was in the “mutual interest” of OPEC and non-OPEC members to reach such an agreement.
“We know the financial situation of many of the producers is fairly challenging whether they are OPEC and non-OPEC,” Atkinson told CNBC on Tuesday.
“The main dynamic which is facing all of the producers, whether they are OPEC or non-OPEC, was that had the current market situation remained in place we would have gone into 2017 and probably through most of 2017 with the oil market still in considerably surplus supply over demand, and that would be the fourth year in a row where that situation prevailed,” Atkinson said.
The agency added in the report that as OPEC was deciding to cut production last month, its crude output in November was 34.2 million barrels per day (mb/d) – a record high – and 300,000 barrels a day higher than in October.
The IEA also upped its forecast for global oil demand for this year and next year due to revised estimates for Russian and Chinese demand. It saw growth of 1.4 mb/d for 2016, 120,000 barrels a day above the previous forecast. Growth in 2017 is now seen at 1.3 mb/d, an increase of 110,000 barrels a day from its previous estimate.