OPEC’s production policy has had a significant impact on oil supply and prices over the past two years. As the chart shows, since OPEC decided in November 2014 not to cut output, it has added roughly 2 million barrels per day (b/d) of supply, weighing on prices and delaying the market’s rebalancing.
Before OPEC announced potential cuts at a late-September 2016 meeting in Algeria, our baseline was for seasonal dips in OPEC output before a return to a new high next summer, leaving an annual average of 33.35 million b/d in 2017. Our previously forecast 100,000 b/d net inventory draw in 2017 assumed larger draws on commercial stocks and growth in strategic petroleum stocks. This would set the stage for an uptick in prices to the low to mid $50s.
However, should OPEC achieve its proposed range of 32.5 million–33 million b/d, balances would tighten and the storage surplus could dry up, pushing prices toward $60/bbl. While oil bulls see hope in this OPEC dialogue, we’re more cautious about revising our production outlook, given that output keeps climbing and that imposing and monitoring production discipline have proven challenging for OPEC historically. In addition, assuming normal overproduction of 300,000 b/d, OPEC would only match our baseline expectations for actual output.
All told, we think OPEC is more likely to disappoint than surprise to the upside.