China has been the primary pillar of global demand growth as the Saudis have struggled to maintain their historical stranglehold on the market.

 

RBC Capital Markets said price moves since the recent successful OPEC and non-OPEC ministerial meetings suggest that the Saudis' messaging around the cartel's deal to cut production had proven successful.

 

However, the firm said "the ground game in key demand regions is where the war will be won".

 

The announcement from OPEC of a headline cut to 32.5 million barrels per day for the first six months of 2017, which included production targets for all members other than Nigeria, Libya, and Indonesia, will fail to deliver an actual OPEC production total of 32.5MMbopd 

 

KPMG believes a total around 33MMbopd is more probable for the first quarter, which will sharply reduce the pace of inventory accumulation, but will not lead to inventory draws until the June quarter.

 

"Given the rock solid credibility of the Saudi/Gulf Cooperation Council portion of the cuts, this will clearly put a floor under prices and provide OPEC producers with some respite from their financial difficulties," KPMG said in its latest Market Update. 

 

The firm, however, is "very sceptical" of non-OPEC pledges of cooperation, including Russia's, given the lack of successful precedent. 

 

"Russia will at most make token cuts, which would not materialise quickly in Q1 2017," KPMG said. 

 

"This leaves crude oil prices likely to stay in the lower $50s through early 2017, rising into the upper $US50s in the second half, even as OPEC production probably begins to track back up, either through declining compliance or through a rollback of the cuts, which are primarily intended to prevent a price drop during the low refiner demand season in the first half of the year."

 

Even among this scepticism, the deal allows signatories to reduce production voluntarily or through managed declines "in accordance with an accelerated schedule." 

 

RBC believes the more impressive event last week was the follow-on commitment by Saudi Arabia's oil minister, Khalid Al-Falih to cut further if necessary. 

 

"While the non-OPEC agreement was not entirely spectacular, Saudi's immediate pledge to do more shows the Kingdom is serious about silencing the sceptics and firming the floor," RBC said.

 

"While the Kingdom appears adamant in shoring up global balances and market sentiment, its ground game in key demand growth regions remains a top priority. 

 

"Cuts to production means that exports to certain regions (like Europe) will fall - telegraphed through the recent raising of official selling prices across all crude qualities to Europe and the Mediterranean while discounts were made to Asia."