January is ‘the first big test’ for OPEC production deal: Analysts

Participants attend the opening session of the 15th International Energy Forum in Algiers on September 27, 2016.

Ryad Kramidi | AFP | Getty Images

Participants attend the opening session of the 15th International Energy Forum in Algiers on September 27, 2016.

In late November, OPEC members pledged to cut production by 1.2 million barrels per day – for the first time in eight years. In early December, some non-OPEC countries, such as Russia, joined their efforts and promised to cut output by 600,000 barrels per day. Their aim is to lift oil prices.

“OPEC production cuts will help alleviate the current oversupply, allowing recent price gains to be sustained, and possibly providing momentum for even higher prices,” Thomas Watters, global ratings credit analyst at Standard and Poor’s, said last week in a note.

“But, as higher prices kick in, shale production would likely quickly ramp up, effectively capping oil prices above $60,” he added.

So far, Venezuela, an OPEC-member, has already confirmed that it will cut production by 95 000 barrels a day as of January 1. Given its economic struggles, implementing the deal is in its interest.

But according to Dryden from JP Morgan, the U.S. dollar is likely to strengthen in 2017 which could force countries, like Venezuela to keep production at present levels.

“A stronger dollar puts pressure (on financial balance sheets for some countries, like Venezuela),” Dryden said.

A stronger dollar means that some countries will be more indebted and thus forced to produce more oil to offset the impact on their balance sheets.

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