Saudi Arabia has informed its crude oil customers that supply cuts will be enforced from January onwards to comply with the Opec output reduction agreed last week.
Energy intelligence firm PIRA said late on Thursday the supply cuts to Saudi Arabia's customers will be in varying measures. It, however, said supply to North America will be slashed at a higher rate due to lower margins from this region.
The Organization of Petroleum Exporting Countries (OPEC) agreed on an output reduction last week, two years after the oil prices crashed. For Opec, reaching an agreement on output cut was easier said than done due to the diverse mix of its members.
Opec's 13 members – Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela – all placed their own differing budget pressures and market share priorities on the table whenever the issue of output slashing came up. Though the price crash had sent shockwaves across the major crude producing belt in the Middle East, individual producers had their own financial priorities to look after.
While Iraq and Libya were slowly emerging from the impact of devastating wars, Iran had only recently broken free of crippling western sanctions. With the Opec unable to reach a unified stance, Russia, the other biggest crude producer, remained on committal.
However, the landmark output reduction that was announced last week came after Riyadh and Tehran finally papered over the differences. Russia had agreed to an output reduction contingent on the Opec reaching a unified stand. With Moscow committing an output reduction of nearly 300,000 barrels a day the major producers have now lined up to put in place a brace for the falling prices. The output cut will come into force on January 1 and will remain in place for six months.
A Saudi-led Opec output reduction in the 1970s had resulted in a surge in prices. After last week's announcement oil jumped more than 10 percent but analysts are skeptical if a sustained price rally will stay in place. A price rally will depend on how steadfast the diverse Opec members will be in their output cut promises.
Even in the latest round of cuts, it's not yet clear how much will be Iran's share. Tehran, which produces around 4 million barrels per day, has consistently argued that an output reduction will be punitive on the nation as it was still limping back to normalcy after years of trade sanctions.
It also remains to be seen how long Saudi Arabia will be able to bite the bullet and push ahead with the painful cuts to its inventory. Riyadh controls around 13 percent of world crude production, followed closely by Russia and the US. And there are a whole lot of smaller producers outside the Opec. If all, or a clutch of these producers go for ramping up production in the hope of gaining market share, it will undermine the Saudi plan.
Again, a rise in prices due to the supply cut will invariably help the US shale or tight oil producers who will be encouraged to ramp up production, which in turn will drive crude prices lower. All said, it remains to be seen how the Saudi-initiated supply cuts will kick in from January and how far crude prices will remain buoyant.