One month into the implementation of Opec and non-Opec agreement to reduce production and expedite the rebalancing of the oil market, it is perhaps time to review the development so far.

Oil prices are the measure of the effectiveness of the agreement. Remember that the market reacted sharply to the news that there will be an agreement and crude prices jumped by almost $10 (Dh36.70) a barrel inside a few days. Just after the agreement with non-Opec producers, the Opec reference basket of crudes tested $53.24 a barrel.

Prices hovered around this level moving in a narrow range mostly influenced by speculation whether the agreement will be implemented in earnest and compliance would be high. The average basket prices were $43.22, $51.67 and $53.92 a barrel in November, December and January respectively.

In this column on December 4, I said “There is no doubt that the agreement is significant especially if compliance is high and the agreement is extended to the end of 2017. The market is said to be “broadly optimistic”, but do not expect prices to go beyond $60 a barrel at best.”

Well, we have not tested $60 a barrel yet and News Base Research recently said: “A consensus has emerged that oil prices will remain somewhere in the $50-60 per barrel range over 2017”.

Given the current situation and expectations, I still maintain this position as in my humble opinion there are opposing forces acting to prevent substantial appreciation of prices. It is too early for major forecasters such as Opec and IEA to report on the level of production of individual participants in the agreement.

However, a Reuter’s survey showed that crude oil production from the 11 Opec members averaged 30.01 million barrels per day (mbd) in January, versus 31.17 mbd in December. It concluded that compliance is about 82 per cent while petro-Logistics estimates a reduction of only 0.9-mbd and compliance of 75 per cent.

Momentum

We have to wait for the Opec Secretariat report on January production and also the report of the Ministerial Monitoring Committee, who will report on Opec and non-Opec production. Judging by previous experience, the first month of an agreement is often not a good measure for compliance.

But oil producers cannot afford to lose momentum and on the price as it is will improve their finances and, perhaps, allow investment in the industry to go on.

Another reason why prices are not appreciating further is the resurrection of shale oil production and the rise of active drilling rigs in the US.

The Energy Information Administration reported that US production has risen by 6.3 per cent since July to almost 9 mbd now and is expected at 9.3 mbd in 2018. Current prices are encouraging this trend but the reduction in cost and improvement in well productivity are playing their roles.

Active rigs have persistently risen since the low of 316 in May 2016 to just over 700 in early January. The majority of this increase is in shale oilfields and the small operators there are planning more investment. However, it is believed that shale operators are now more interested in productivity and profits rather than just raising volume.

If they raise volumes too quickly, oil prices will head down and no operator wants that.

There are other dangers to the Opec agreement. Libyan production can increase once the political situation improves.

Nigerian production can also pick up steam once the violence in the producing regions is controlled. Iran may not be satisfied with the 90,000 barrels a day increase in is production allowed by the agreement. Rosneft, the largest producer in Russia, hasn’t come out with a positive statement about the agreement and may not cut as much as Russia undertook.

Iraqi partners of international oil companies may make it difficult for the Ministry of Oil to make up the promised cut in production.

Different forecasts

Coming months may shed more light on compliance and show if the risks briefly outlined above will materialise or not.

But the stark differences between Opec and IEA forecasts is confusing ... and for a long time not as much as it is in this month’s market reports of both organisations. While both organisations agree about the general direction of market fundamentals they differ on the timing and volumes.

To give an example: Opec estimates that first quarter 2017 may see a stock build of 56 million barrel while IEA forecasts close to 80 million barrels.

Both organisations work from more or less the same data bases and regular meetings between them are common. Therefore, a discussion of this issue should be on the table.

No matter how complex the oil market is today, compliance with production undertakings is key to a stable market.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.