Oil producers — both Opec and non-Opec — proved that their December 10, 2016 ‘Declaration of Cooperation’ is not a one-time thing as they prepare to work together to achieve a more stable market. The meetings in Vienna last month celebrated the anniversary with an amendment to extend the mandate to end 2018, whereby producers pledged to maintain their cuts totalling 1.8 million barrels a day (mbd) from the agreed level of October 2016.

The agreement achieved a great deal in raising oil prices from just below $30 (Dh110) a barrel in January 2016 to over $60, but the other objective of reducing oil stocks needed more time. OECD commercial stocks were reduced from 380 million barrels (mb) above the five-year average in February 2016 to 140-mb in October 2017. With the exception of China, global stocks have gone down in every other region, including oil stocks on tankers.

But market participants felt more needs to be done if stocks are to fall to a reasonable level towards the previous five-year average. At the rate stocks were falling, March next would not have been enough to reach the level desired by Opec and non-Opec participants. This is also a function of what producers outside the agreement would do in the interim.

Analysts agree that non-Opec production would increase in 2018 and the Opec Secretariat and the IEA forecast the increase to be of the order of 1-1.4-mbd, respectively.

The doubts that surfaced a couple of weeks just before the meeting conference were dispelled by the swiftness of the new agreement and a realistic mechanism to make reviews if necessary. The producers accepted the recommendation of the Joint Ministerial Monitoring Committee to extend the agreement to end 2018 “while pledging full and timely conformity of Opec and participating non-Opec countries”.

The new amendment states that “In view of the uncertainties associated mainly with supply and to some extent demand growth, it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress achieved towards re-balancing of the oil market at that time.”

This addition was probably necessary to satisfy Russia where it previously doubted a nine-month extension. I may add here that this agreement is not of the type written in stone and in the event that market conditions change drastically, there is always room to call a meeting to take corrective measures. Especially if there is a supply crisis or a price overshoot.

Khalid Al Falih, the Saudi minister, clearly told reporters that “We will be agile and respond as events unfold.”

The oil market was “demanding” such an agreement and therefore the reaction was rather muted. The Brent price just before the meeting was about $62 and the day after rose to almost $64.50 before settling at $63.70. The market has taken the agreement in stride and priced it in. Therefore, analysts do not expect prices to appreciate much further.

The other positive is the agreement in principle to cap Nigeria’s production in 2018 to 1.8 mbd and Libya’s at 1 mbd. The two countries were exempted from previous agreements, but the cap was made as both said that their 2018 levels will not exceed what they achieved in 2017.

A new and important issue was frequently mentioned in the media regarding the exit strategy after the end of the agreement. One report said that “Russia has signalled it wants to understand better how producers will exit from the cuts as it needs to provide guidance to its private and state energy companies.”

This is indeed important for all the producers and a rule cannot be laid down without consideration of the prevailing conditions. The Saudi minister said “it was premature to talk about exiting the cuts at least for a couple of quarters”. More importantly, “When we get to an exit, we are going to do it very gradually... to make sure we don’t shock the market.”

Can the producers get support from US shale producers? Scott Sheffield, executive chairman of Pioneer Natural Resources Co and one of the largest shale producers, said: “If producers in the US increase their rig count over the next few months due to higher prices then I expect another price collapse by the end of 2018. I hope that all US shale companies will maintain their current rig counts and use all excess cashflow to increase dividends back to their shareholders.”

Let us hope they do so.