Opec: the commitment alone may be not enough

Opec: the commitment alone may be not enough

Elisa Maria Giannetto
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January's reduction in oil production is positive, but ever less is being invested in exploration

The International Energy Agency, IEA, is optimistic about the cuts to global oil production, but other factors may dampen the initial enthusiasm. In January - as reported by the Paris agency - oil supplies fell by about 1.5 million barrels per day, 1 million of which thanks to the commitment of the OPEC countries. Figures that show the fulfilment of 90 percent of the agreement between OPEC and non-OPEC countries, which establishes an average cut in production in the first six months of 2017 of 1.8 million barrels a day. If the January level is kept up in the coming months, the drop in production, combined with the strong growth in demand, could help ease the effects of record oil stocks accumulated over the past two years. However, the rebalancing of the oil market, according to IEA, is complicated by other factors: the collapse in oil prices since mid-2014 registers a decline in new discoveries of oil fields, a sign that companies are spending less and less for oil exploration and production activities. According to the US newspaper Forbes, oil production in the US has declined in almost all major areas of the country. The exception is the Permian Basin, which continues to show an upturn. Since 2011 oil production in the said field has more than doubled, and today has reached 2.2 million barrels per day. The area has been producing oil for almost 100 years and has already generated more than 30 billion barrels of oil and 100 billion cubic metres of natural gas. The only global competitor is the Ghawar Field in Saudi Arabia. Even though younger, its production rate stands at 5 million barrels a day, and it still has a great potential to be explored. One will have to wait a few months though to be able to sum things up: Oil prices will also be affected by the increase in supply of some of the non-OPEC producers who did not sign last year’s December 10 agreement. Indeed, after the reduction of 800 thousand barrels registered in 2016, output from the non-OPEC countries will grow by an average of 400,000 barrels per day in 2017, with the combined increase in production of Brazil, Canada and the US that could reach peaks of 750,000 barrels per day. While on the demand side, the demonetization policy decided by the Indian Prime Minister Narendra Modi could lead to a contraction in world oil demand. In January, India in fact reached its lowest point since May 2003. Even though many hope this effect will fade quickly.