The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, have traded slightly lower to start 2017.
However, there is a chance oil could rally as 2017 moves along as more oil-producing nations rein in production.
The Organization of Petroleum Exporting Countries (OPEC) has already agreed to reduce output by 1.2 million barrels per day. After the non-OPEC producers’ cuts, total reduction now represents almost 2% of global supply. The reductions took effect January 1, and the oil producers will reconvene after six months to evaluate the results of the deal.
In a reversal of previous sentiments, Saudi Arabia accepted Iran’s higher output target as a special case. Previous OPEC talks broke down after Iran, which suffered from curtailed exports under strict global sanctions, argued for increasing its output to pre-sanction levels. However, there are some potential problem children within the cartel that could undermine the output reduction effort
There are concerns that Libya and Nigeria will be boosting output in the near-term and that other OPEC members could violate terms of the output reduction effort. Non-OPEC producers appear diligent regarding output cuts.
“The 11 non-OPEC signatories to the deal have pledged to cut 558,000 bpd of their combined production between January and June, joining OPEC’s plans to shave off 1.2 million bpd of the cartel’s total production in the first half of 2017. Out of the 558,000-bpd non-OPEC cut, Russia has pledged to curtail output by 300,000 bpd, but would do so gradually over the first six months of the year. So far, Russia has said that it reduced output by 117,000 bpd in January,” reports OilPrice.com.
OPEC and Russia have in all cut at least 1.1 million barrels per day in production so far. However, Societe Generale oil analyst Michael Wittner said U.S. shale output was rebounding faster than expected as more rigs drilled better and more efficient wells more quickly.
“According to Bloomberg estimates — based on IEA and OPEC figures — non-OPEC compliance in January was 48 percent, with output reduced by 270,000 bpd. Among the 11 non-OPEC nations, only Oman – a Saudi Gulf Arab ally and a member of the Gulf Cooperation Council (GCC) – brought its production within the level it had promised,” according to OilPrice.
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