Crude-oil prices lost steam in early Asian trade Tuesday as investors turned bearish over oil producers’ commitment to observe a deal aimed at easing supply to the market.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in January traded at $52.75 a barrel at 0347 GMT, down $0.08 in the Globex electronic session. February Brent crude on London’s ICE Futures exchange rose $0.01 to $55.70 a barrel.
The price fall is largely a reflection of investors’ bearishness over a deal that is supposed to lift prices to at least the $60-$70 range per barrel. This shows the market isn’t really buying the OPEC rhetoric and that they recognize the potential risks.
Over the weekend, 11 non-OPEC countries, including Russia, agreed to slash their output by 558,000 barrels a day, in concert with OPEC’s own pledge to cut 1.2 million barrels a day. The total sum represents almost 2% of global supply.
The deal will take effect on Jan. 1 but the reduction will be carried out in phases. Participating countries will meet in six months to evaluate progress.
Analysts say if producers fully adhere to agreed quotas, the oil market could shift into a deficit. OPEC’s own calculations forecasts world crude demand will hit 95.5 million barrels a day in 2017, an increase of 1.2 million barrels a day.
Removing excess barrels will lift prices, possibly into the target range of $60-$70 per barrel, but it would mostly hinge on the compliance of the producers who have been known to cheat, BMI Research said.
“We note that the higher the barrel price, the greater the temptation to break allocated quotas,” the firm said.
In 17 production cuts since 1982, OPEC members have reduced output by an average of just 60% of their commitments, according to Goldman Sachs.
Production from Nigeria and Libya, the two OPEC members currently exempt from the deal, also adds downside risks to the success of the OPEC plan, Morgan Stanley said.
The OPEC deal was based on production data in October that showed Libya’s production at 528,000 barrels a day.
However, energy consulting firm Rapdian Group now predicts the odds of Libyan’s oil production hitting 750,000 barrels a day are now 55%, buoyed by ongoing talks between the government and insurgent groups to reopen a key pipeline.
Oil production in Nigeria has also edged up in the past few months. However, the situation there remains murky with several new militias in the Niger Delta reportedly sabotaging the recovery process.
The effect on demand of higher oil prices is also fueling market skepticism over how successful the deal will be, JBC Energy said.
The firm said recent growth in the number of active oil rigs in the U.S. shows shale producers are ready to swoop in to benefit from the higher prices. The firm asked how long countries making cuts would be able to hold out at lower supply levels. “Are they prepared to do so on an extended basis?”
Nymex reformulated gasoline blendstock for January—the benchmark gasoline contract—fell 19 points to $1.5411 a gallon, while January diesel traded at $1.6716, 1 points lower.
ICE gasoil for January changed hands at $490.00 a metric ton, down $1.00 from Monday’s settlement.