The monitoring committee meeting between OPEC and non-OPEC countries in Vienna this weekend is likely be light on further details about their output restraint agreement and heavy on a show of solidarity, but it could be that very collective goodwill that is key to ensuring compliance and bringing about a faster oil market rebalancing.
Initial signs look positive, with almost all of the countries singing from the same hymn sheet and leading member Saudi Arabia proclaiming that it will cut output even further if need be, but rebalancing won't be achieved through public assurances. Hard and transparent data will be needed to demonstrate compliance.
The market will be closely watching how historically high global oil stocks levels develop, as well as the response to a higher price environment from oil producer countries not party to the deal like the US and Brazil.
This weekend's meeting provides the members with an opportunity to discuss how to make the process more robust, with OPEC having already agreed to independent secondary sources -- of which S&P Global Platts is one -- to measure output.
Non-OPEC producers however only have the national data at their disposal which makes output harder to verify. Analysts note that there is no mechanism to ensure compliance as these countries are independent and OPEC cannot enforce the deal. But how they go about adjudicating will go a long way to adding credibility to the deal.
"They may explore their approach to producers that are not planning to make a uniform reduction over the whole six months, such as Russia and potentially UAE, if they have not considered that previously," said Richard Mallinson, a geopolitical analyst at Energy Aspects.
If producers don't make big enough cuts from the outset they will face an uphill task later in the six-month period to achieve the average, which would undermine market confidence in the deal.
COMPLIANCE FORECASTS
Analysts are mixed about the degree of adherence that countries are likely to stick to, but a consensus seems to be around 60-80%.
"Our view is that within OPEC compliance will be around 80%, largely due to Saudi Arabia and the other Gulf country states," Mallinson said.
"Around a third of the non-OPEC cuts are simply formalizing base declines that would have occurred without the deal, but the pledges by Russia, Oman and Kazakhstan will all have a meaningful impact on balances and the early signs are that all three countries are following through."
But all this could be offset by Libya and Nigeria, which are exempt from the deal. Both have seen production rise in January, according to preliminary estimates.
If some key countries fall way short of their commitments and Libya and Nigeria add a sizeable chunk of output, this could slow rebalancing significantly.
"OPEC and Russia will meet tomorrow to congratulate themselves about compliance but a rebalancing in the first half requires nothing less than full compliance and no further rebound from Libya and Nigeria," said Olivier Jakob, managing director at Petromatrix in an analyst note.
"There is not a lot of margin-of-error in the numbers to guarantee a significant global stockdraw in the first half," he added.
Giovanni Staunovo, commodity analyst at UBS said: "I expect full compliance from Gulf countries and a moderate cut in Russia, and I remain skeptical on Iraq. Algeria and Venezuela might also implement their cuts (although in Venezuela more unintentional) considering that they are in the monitoring committee."
This is the first time in eight years that OPEC has decided to trim production and this cut also comes almost two years after compliance went off the menu and a freewheeling production policy was the order of the day.
But here comes the caveat: the more successful OPEC and the 11 non-OPEC producers are in speeding up the market rebalancing and pushing up prices, the quicker the turnaround in output from the likes of the US, Canada, Brazil, China and Colombia, which could counterbalance the cuts.
The IEA on Thursday predicted US shale will make a 500,000 b/d gain from December 2016 to December 2017 even though Saudi Arabia has played down the speed of the shale oil resurgence due to associated cost inflation that will eat into producer competitiveness and the challenges of getting things up to full speed.
SAUDI, RUSSIA OFFER ENCOURAGEMENT
A lot has been written about the growing bond between Saudi Arabia and Russia in getting the OPEC/non-OPEC deal over the line late last year, and it will be these two that will be lighting the way for others to follow. Saudi Arabia, OPEC's largest producer and the world's largest crude oil exporter, has set the precedent with its minister recently saying production this month was less than 10 million b/d, its lowest output in almost two years after hitting highs of 10.72 million b/d late last year.
But after just three weeks there will be limited data to review apart from production estimates from the countries themselves and it is too early for news agencies, think tanks, data and analytics firms, and tanker tracking data or other external sources to give a reliable assessment.
Russia fulfilling its promised cuts is also seen as a key factor in whether or not the deal will succeed but there have been some promising signs from Moscow with a commitment to reducing its crude production, albeit gradually, by 300,000 b/d from October's 11.2 million b/d.
Preliminary data from the Russian energy ministry's Central Dispatching Unit indicated that output was down by as much as 150,000 b/d on some days in early January, although this was largely due to abnormally low temperatures in some oil producing areas.
Analysts are cautious about drawing any conclusions until data for the full month of January is released on February 2. CDU data will be used to assess Russian output throughout the duration of the deal.
"I think the estimate of 50,000 b/d cut by the end of the month is reasonable, I think everybody is complying and will continue to comply," one Moscow-based analyst said Thursday.
