SAUDI Arabia reasserted its leadership of the oil markets at the OPEC/non-OPEC meeting on November 30 in Vienna, brokering its desired extension of the 1.8 million b/d output cut agreement by nine months until the end of 2018.

The meeting had the market on tenterhooks as Russia, a crucial player in the deal, kept its cards close to its chest having earlier suggested that ministers not take any decision on the cuts at this meeting.

But Saudi energy minister Khalid al-Falih’s diplomatic prowess shone through.

Falih emerged from the talks deal in hand, pledging a firm commitment to completing the rebalancing of the market and promising to keep a close eye on his OPEC counterparts, many of whom have been lax in compliance with their quotas.

To help beef up the deal’s impact, Nigeria and Libya were issued a combined 2.8 million b/d output cap. Both nations had previously been exempt from the cuts.

Crucially, though, the extension includes an early exit option if the market overtightens, with the deal subject to review in June, when the coalition will meet again.

Front-month ICE Brent crude futures moved slightly higher after the November 30 meeting settling at US$63.73/b on December 1. This is up 37% from their 2017 low of $46.51/b on June 21.

The aim of the agreement is to lower OECD inventories by 150 million barrels from their current levels, Falih said - even more ambitious than the OPEC/non-OPEC coalition’s stated goal of reducing them to the five-year average. Commercial OECD oil inventories stood 140 million barrels above that benchmark as of October, OPEC has estimated.

Falih is also assuming co-chairmanship of the monitoring committee overseeing the deal, alongside Russian energy minister Novak, in a move that will ensure his stewardship of the extension.

So what does the extension of the output cut agreement mean for Asia, which relies on the Middle East for most of its supplies?

One industry observer said that this extension marks a turning point for Asia to lower its dependency on Middle Eastern oil.

The deal is expected to leave more room for Asian refiners and importers to diversify supply sources away from the Middle East in 2018, with the US likely to play a key role as a an alternative supplier.
 
China’s Unipec, the international trading arm of Asia’s biggest refiner Sinopec, has said that more US crude will flow into China next year.
 
The US exported 1.473 million b/d of crude oil in September, nearly double the 772,000 b/d exported in August, according to the US Energy Information Administration. Asia accounted for the largest US crude oil export destination by region, with supplies at 604,000 b/d, of which China took 251,000 b/d, followed by 150,000 b/d imported by South Korea.
 
A South Korean refiner said it expects a further rise in the company’s non-Mideast share of oil imports to 35% in 2018, up from 30% in 2017 and 10% in 2016 as long as prices remain favorable.
 
Reflecting the rising flows of non-traditional crude sources into Asia, China’s imports from North America surged to 150,000 b/d in the first 10 months of 2017, up from merely 15,500 b/d in a year ago, led by higher volumes from the US.
 
One obvious risk to the rebalancing of the market is further growth in US shale oil production as prices rise.

According to latest Baker Hughes data, US rig counts inched up in the week of December 1 as industry signals, notably crude oil prices, continued to improve. The total rig count in the US stood at 929 in the week ended December 1 compared with 596 in the same week in 2016.

US NYMEX light, sweet crude has risen from its 2017 low of US$43.78/b on June 21 to US$58.36/b on December 1.

But with some US$1 trillion decline in upstream investment since the 2015 drop in oil prices, the oil industry is set up for a massive supply crunch in a few years if investment is not back.

New investments are needed, particularly in deepwater and other new projects, Bahrain’s oil minister Sheikh Mohammed bin Khalifa al-Khalifa said recently, stressing that US shale may prove to be a limited resource.

Talking to S&P Global Platts, Khalifa said that there is a potential supply challenge that’s coming in the future.

“That’s what markets don’t see,” he said.

OPEC members “want markets to be balanced enough to trigger investments back,” he said.

Mriganka Jaipuriyar is associate editorial director, Asia and Middle East oil news and analysis, at S&P Global Platts