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To exit or not to exit: That’s the OPEC question

OPEC is a good news, better news, story and will continue being so until June 2018 when pundits will be proven right or wrong about supply gluts diminishing or not, and whether countries like Russia, itching to exit, will do so or continue holding back.

Here’s the good news first.

Not so much glut

The first good news is that OPEC cut compliance reaches 122% in November 2017, says Kuwaiti oil minister Bakheet Al-Rasheedi, signalling strong compliance commitment from OPEC and non-OPEC states.

“This is a strong signal to the oil market that OPEC and non-OPEC members participating are committed to the success of this agreement and are willing to do everything possible to restore the oil market balance,” said al-Rasheedi, as quoted by Kuwaiti news agency KUNA.

The 14-member oil producing countries and 10 non-OPEC producers, including Russia, agreed on December 1, 2017 to extend the cut of 1.8 million barrels per day until the end of 2018, to reduce excess supply and dip into global reserves.

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The alliance is targeting the elimination of an oil glut to bring global oil inventories back to the industry’s five-year average, which is 50% achieved today.

The strategy succeeded to lift oil prices from less than $30 a barrel in early 2016 to around $60 today.

Saudi Arabia’s energy minister Khalid al-Falih was more on the fence, telling Reuters it was premature to discuss any changes to the OPEC-led supply cut pact.

Falih said market rebalancing is unlikely to happen until the second half of 2018, and if it does, any potential exit would be done gradually.

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Here’s the better news

Reuters says that rising U.S. crude production, which has soared by 16% since mid-2016 to 9.8 million bpd today and soon to be 10 million, was keeping oil prices from moving.

US shale oil producers are pumping at current prices.

Falih said, “even with the extra supply coming from the United States that will not slow the momentum of rebalancing on the back of healthy demand growth projections in 2018.”

OPEC’s desire to clear the global oil inventory overhang may come sooner than expected, enabling the group to exit from its production cuts early, according to Goldman Sachs Group Inc, as reported by Bloomberg.

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Global stockpiles will remain below seasonal levels and continue to shrink through the second quarter of next year, said the bank.

“The market will have re-balanced by mid-2018, fast-forwarding OPEC’s exit from production cuts to the second half of the year,” according to Goldman, which kept its forecast for Brent crude at $62 a barrel.

Brent futures rose to $63.85 a barrel or about 12% this year.

Worst case scenario

The International Energy Agency  (IEA) says that non-OPEC supply next year will probably rise by 1.6 million bpd and U.S. shale production alone will, according to IEA’s latest estimate, grow by 870,000 bpd in 2018. Meanwhile, demand will rise by 1.3 million barrels daily next year, hinting at another glut in the making, around 1.47 million in over supply.

OPEC has disagreed with these predictions.