(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2hcnjbu
* Chart 2: tmsnrt.rs/2i0JU7A
* Chart 3: tmsnrt.rs/2i0Jiia
By John Kemp
LONDON, Dec 21 OPEC and non-OPEC oil producers
have agreed to reduce their combined output by more than 1.7
million barrels per day for six months from January 2017.
But the agreement contains a provision that it can be
extended for a further six months, subject to market conditions.
Oil traders are betting on an extension, with most of the
rebalancing of the oil market expected to occur in the second
half of 2017.
Storage tanks are expected to remain fairly full throughout
the first six months of the year and only start emptying from
Brent time spreads, the difference between futures prices
for different months, provide an insight into how traders expect
stocks to behave.
Brent futures prices remain in a contango through the first
half of 2017, reflecting the need to cover the costs of storing
and financing large volumes of crude (tmsnrt.rs/2i0JU7A).
But the contango starts to narrow significantly around June
and disappears entirely by the end of the northern hemisphere
The current structure of futures prices implies it will no
longer be necessary or financially viable to store such large
volumes of crude from the third quarter onwards.
The futures price curve contains an expectation about the
state of supply, demand and the demand for storing oil.
Like any other forecast, the curve can be wrong. The oil
market could rebalance faster or slower than currently expected.
For example, traders expected stocks to start drawing down
from the middle of 2016, and instead they continued to increase.
But the curve does provide the best indication that we have
about the expected timescale for rebalancing and stock draws.
The curve implies a modest drawdown in stocks is expected
during the first half and then a much faster drawdown in the
second. The expectations appear reasonable.
The oil market will start 2017 with a high level of
inventories inherited from 2016 thanks to recent increases in
production by both OPEC and non-OPEC countries.
And the end of the first quarter and start of the second is
traditionally the weakest time of year for crude demand with
many refineries doing maintenance after the winter heating
season and before the summer driving season.
But by the middle of the year, U.S. refineries will be
ramping up crude processing to meet summer driving demand from
And Saudi Arabia and Iraq will both be increasing the amount
of crude burned in their power plants to meet summer demand for
electricity and air-conditioning.
Just as importantly, the underlying demand for crude around
the world will continue increasing, provided the global economy
avoids a recession, helping tighten the market.
The structure of futures prices implies that OPEC and
non-OPEC producers will agree to roll over their output curbs in
May and June.
Targets may be modified, and compliance with them may weaken
as time goes on, but the oil market's expected shift into a
deficit from mid-year implies some degree of production
discipline is likely to be maintained.
The principal risks to this forecast are (a) significant
non-compliance by OPEC and non-OPEC; (b) a big increase in
uncapped Nigerian and Libya production; (c) a global economic
slowdown; and (d) a significant increase in U.S. shale
production in response to higher prices.
Any of these factors could delay the expected rebalancing
yet again. But in their absence, the oil market is expected to
move into a significant supply-demand deficit by the middle of
2017 and draw down stocks heavily in the second half.
(Editing by Mark Potter)