1. OPEC and non-OPEC countries agreed to cut oil production by 1.8 million barrels per day in an effort to boost falling oil prices. OPEC will cut around 1.2 million bpd, with the largest cuts from Saudi Arabia, Iraq, UAE, and Kuwait. Russia and other non-OPEC countries will cut around 0.6 million bpd, led by 0.3 million from Russia. 2. The agreement led to an initial spike in oil prices over 15% to $54/barrel. However, implementation risks remain from countries like Iraq and uncertainties around continued cooperation from Russia. Oil prices are expected to remain in a $50-60/

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2. Special Report | December 20162
we view to be in the region of 3.8 to 4m b/d – the increase will probably take Iranian production
to the highest possible level without further investment.
Separately – but integral to this deal – is the involvement of non-OPEC countries, led by
Russia, who on 10 December agreed to formally cut their production by a combined 0.6m b/d.
Of this this figure, the largest cuts will be shouldered by Russia (0.3m b/d), followed by Mexico
(0.1m b/d) and Azerbaijan (0.04m b/d). Taken together, the proposed cuts by both OPEC and
non-OPEC countries amount to 1.8m b/d. While this on paper seems pretty impressive,
implementation risks remain high. Among the OPEC countries, this is especially the case in
Iraq, where the dire security and fiscal situation makes a meaningful cut rather difficult.
Moreover, Libya and Nigeria are exempt from the agreement as production in both countries is
recovering from security related issues. Libyan production increased to 0.5m b/d in October,
doubling since August, but still only a third of the pre-war level. Nigerian production increased
to 1.6m b/d which is still lower the 2014 level of 1.9m b/d.
…Which has solicited a euphoric response on the part of the markets
Notwithstanding the implementation risks outlined above, the markets have used the OPEC
accord as a rallying call. Indeed, in the initial three day period after the deal was struck, prices
rose to the tune of 15% to over US$54/b. While they dipped slightly thereafter, the subsequent
agreement with non-OPEC countries, served as another leg-up in oil prices. In fact, for a short
period oil prices breached US$57/b, though they have backed up somewhat since and appear
to be hovering around the US$55/b mark. Notwithstanding this, if key technical gauges, such
as the 200-day and 50-day moving averages are any guide, oil price from a momentum
perspective continue for the time being to hold their own (see Chart 2).
-0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2
S. Arabia
Iraq
UAE
Kuwait
Venezuela
Angola
Algeria
Qatar
Ecuador
Gabon
Iran
(Million, b/d)
Chart 1: Distribution of production cuts among
OPEC member states
(Source) OPEC, Press reports, BTMU Economic Research Office

3. Special Report | December 20163
Going forward, our sense is that the initial market enthusiasm about the OPEC deal will give
way to a greater focus on whether the proposed cuts are in fact achievable. With this in mind,
we are of the opinion that oil prices going forward are likely to struggle to rise much beyond
their current levels and, if anything, are likely to remain range-bound within a pricing band of
around US$50-60/b.
Our sense is that the short-term market response may have been overdone
While the U-turn performed by OPEC to try and put a floor under oil prices, has on the whole
been well received – especially in light of the austerity drive some oil producing countries,
including those in the GCC – have been undergoing recently, we do not necessarily see these
cuts as a game-changer in their present form.
 For one thing, the proposed cuts still need to be enacted and, as we alluded to above, with
some OPEC countries exempt from the cartel’s production agreement, actual OPEC
production could still surprise on the upside going forward (see below). Additionally, the
agreement is also contingent on the cooperation of non-OPEC countries, such as Russia,
for which there are few, if any, historical precedents. While Russia’s commitment to
undertake production cuts to the tune 0.3m b/d seems to be pretty bold move, at least on
paper, we question the willingness of the country to see this through, especially in light of
its current fiscal predicament. A further point worth noting here is that new production
facilities are expected to come on stream in certain countries such as Brazil, Canada and
Kazakhstan. With regard to latter, a case in point is the Kashagan oil field, which started
production this October and, according to ENI, one of the developers of the field, could
through the course of next year ramp up production to around 0.4m b/d.
 Second, the recent rally in oil prices owes much to investor/hedge fund positioning, which
since the start of this year has seen a rather dramatic unwinding/liquidation of net short
positions (see Chart 3), with the result that the subsequent rebound in prices has been
sharper than one would have expected on the basis of fundamentals alone. This view, in
our mind is also supported by the shape of the futures oil price curve which – while it
continues to slope upwards following the OPEC meeting – has flattened somewhat since
20
40
60
80
100
120
140
10 11 12 13 14 15 16
Actual price
200-day MA
50-day MA
Chart 2: Oil prices continue to hover above key technical levels
(US$/barrel)
(Source) Macrobond, BTMU Economic Research Office
(Year)

4. Special Report | December 20164
the start of this year, suggesting that the market’s view of prices going forward has become
somewhat bearish, such that it no longer believes oil prices will breach the US$60/b as far
out as 2022 (see Chart 4). While this is by no means a perfect measure of future oil prices,
it serves to highlight that – in an environment where the ability of OPEC to deliver on these
cuts is not certain – markets are still cautious about the outlook for oil prices looking ahead.
Moreover, while it’s fair to say that the recent oil rally may bring some immediate relief to oil
producing countries, at current levels of around US$55/b or above, prices are still
meaningfully short of the level required for most OPEC countries to break even in terms of
their underlying budgetary and external current account positions (see Chart 5).
 Third, while symbolically speaking the OPEC’s proposed cuts are significant, there are
other moving parts that also need to be considered. Foremost here is how US shale
producers – which over the past decade or so have upended the traditional workings of the
oil industry – will respond to any OPEC-induced oil price rises. Our sense is that in light of
the efficiency/operational improvements that the shale oil producers have undergone
recently to survive the oil price rout, they will be tempted to ramp up production if, on the
back of the OPEC cuts, prices continue to trend upwards from their current levels of around
US$55/b. Indeed, with the US rig count – and the associated rise in US oil production –
already seeing a noticeable pickup since hitting a low-point earlier this year (see Chart 6),
-10000
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20000
30000
40000
50000
60000
70000
12 13 14 15 16
Net short position have
fallen >70% from their
high point ealier this year
(Source) Macrobond, BTMU Economic Research Office
(Year)
Chart 3: Net short positions continue to be unwound...
50
52
54
56
58
60
62
64
2017 2018 2019 2020 2021 2022
Jan-16
Dec-16
(US$/b)
Chart 4: ...But the oil future curve has flattened
somewhat suggesting that the market takes a cautious
view towards future oil prices
(Source) Bloomberg, BTMU Economic Research Office
(Year)
0
20
40
60
80
100
120
140
160
180
Libya
Bahrain
Algeria
Oman
S.Arabia
Qatar
Iran
UAE
Iraq
Kuwait
Fiscal breakeven
External breakeven
(US$/barrel)
Chart 5: Fiscal & external breakeven positions of selected OPEC
countries in 2017
(Source) IMF, BTMU Economic Research Office

5. Special Report | December 20165
we expect this trend to continue to play out next year, especially if oil prices continue to
exhibit an upward bias going forward.
 Finally, on the demand side, while the overall prospects of the global economy remain
rather lacklustre at, or around, the 3% per annum mark, there has been ongoing conjecture
in the financial press and media, more broadly, that the recent election of Donald Trump in
the US, with his focus on tax cuts and infrastructure spending, will help to spur US demand
for different commodity groups as a whole. We, however, take some issue with this on the
ground that, in the energy space, Trump will seek to promote US energy independence and,
as part of this process, he may be inclined to water down existing environmental
regulations and give tax inducement to US oil and gas firms to boost their current
production levels. The net result of all this, at least over time, could be a material pick-up in
US oil production, a development which, in turn, could help to offset any supply cutbacks on
the part of OPEC member states.
Taking stock/concluding thoughts
The OPEC agreement in our minds represents a welcome first step towards the long-awaited
rebalancing of the global oil market. Indeed, all other things being equal, even if there’s just
50% compliance to the agreed OPEC cuts, we still envision the overhang of excess supply –
which amounts to a figure approaching 0.5m b/d – to be cleared during the course of next year.
Despite this, the agreement, as presently constituted, is not a game changer for OPEC
member states as there are many other moving parts that also need to be taken into account.
Of particular note here is the fact a number of OPEC member states, notably Nigeria and Libya,
are exempt from the production agreement and if these countries were to increase their
combined oil production by some 0.6m b/d that would go some way towards undermining any
cutbacks which are carried out by other OPEC member states. Additionally, of the OPEC
countries that are formally subject to proposed production cuts, the position of Iraq and Iran is
also noteworthy. Iraq is currently slated to cut production by 0.2m b/d, but given its rather
precarious economic and security situation, we are doubtful whether it will actually be able to
make the cuts. Similarly, with Iran’s economy – notwithstanding the partial lifting of sanctions –
struggling to normalise, coupled with the fact that its government is engaged in various proxy
5
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9
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0
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2500
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Rig Count (left axis)
Crude production (m b/d, right axis)
Chart 6: US rig count vs. oil production
(Year)
(Source) Macrobond, BTMU Economic Research Office

6. Special Report | December 20166
wars in the Middle East, it will have little incentive to limit its oil output at the agreed level of
3.8m b/d and we suspect that the country will further strive to return to reach its pre-sanction
level of output, which peaked at around 4m b/d.
Outside the OPEC countries, despite the agreement with the likes of Russia, we suspect that
global oil production will continue to rise apace with new fields in countries such as Brazil,
Canada and Kazakhstan expected to come on-stream over the next 12 months. Over and
above this, with the latest rally in oil prices, we expect some shale plays that have been
mothballed during the oil price rout to re-enter market and this, coupled with the likelihood of
more energy friendly policies under a Trump administration, will likely see a step-up in US oil
production going forward.
A final point worth noting here is that while the announcement of the OPEC cuts has solicited a
positive market response, oil prices at today’s level are still well short of the US$75/b or so
mark which, on average, MENA based OPEC countries need to ultimately balance their
budgets. However, to reach such a level Saudi Arabia, as the de-facto leader of OPEC, would
need to consider cuts upwards of 1m b/d and to hold it down for a year or more. Indeed, that is
precisely what it would have done in the past in recognition of its role as the world’s “swing
producer”. That said, in today’s world, given the difficult economic and security backdrop that
the country faces, it unlikely to want to go down this road for fear of further losing market share
to its rivals.
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