If success is measured in averting another looming supply glut and bolstering OPEC budget deficits, then the nine month extension of production cuts to March 2018 is a triumph of pragmatism.
However, the firmer oil price we expect can only embolden the already resurgent US tight oil industry which is on course to displace the 1 million b/d OPEC has cut within the year.
Three main aspects of the decision stand out
First, an extension is a strong signal to the market that OPEC intends to continue to support price at the expense of market share for the time being. OPEC’s commitment to the production cuts announced in November has been unwavering through April, confounding sceptics. The GCC states, led by Saudi Arabia, actually went beyond compliance; the rest of OPEC and Russia played their part too in the round.
The reward has been a Brent price averaging US$10/bbl higher so far in 2017 than the US$43/bbl in the free-for-all last year. Saudi Arabia alone has benefited by more than US$7bn.
Second, the market proceeds towards rebalancing – albeit like a patient in recovery, at hesitant pace and with a firm helping hand. Our view since January has been that cuts would be extended through end 2017, and that fundamentals tighten. Demand growth exceeds supply growth by around 1.1 million b/d for the year as a whole. A material, sustained draw down in inventory Q2-Q4 rebuilds market confidence and supports Brent at a 2017 average of US$55/bbl.