Oil producers appear to have pulled off quite the coup: the price of Brent crude has jumped more than 20 percent since late September while precious little has changed on the supply side.

In November, the Organization of Petroleum Exporting Countries and other producers, notably Russia, agreed to the first production cuts in eight years. Nations have since complied with their commitments or even reduced output more than expected. Yet the changes are small in absolute terms, as January numbers released by the International Energy Agency and OPEC show.

For all the talk of a huge production cut, in January, the global oil supply fell by 1.5 million barrels a day according to the IEA and by 1.29 million barrels a day according to OPEC. That’s a reduction of a little more than 1 percent. The OPEC forecast for the first quarter of this year shows that at the cartel’s January production level -- 32.13 million barrels a day -- still makes sure the global supply is higher than demand.

The developed world’s commercial oil stocks dropped in January, but they still stand at around 299 million barrels above the five-year average. If the stocks fell by the entire amount of the January production cut, it would take them 200 days or more, depending on whether the IEA or OPEC got the size of the cut right, to get them to that average level. Of course, the stocks won’t fall this quickly because the market is not balanced yet.

The cuts haven’t really done much to fix the real-world oil glut. But talking about them has been very useful to oil producing nations.

Saudi Arabia made a relatively deep output cut in January, reducing output by almost 5 percent compared with the previous month. But the oil price at the end of January was 21 percent higher than on Sept. 27, the day before OPEC’s production cut plans were announced. Theoretically, if no long-term contracts and hedges were involved and the Saudis sold all their oil output at the average market price for the month, they would have made about $50 million a day more in January than in August.

Russia is having even more fun. It ratcheted up production by about 4 percent between August and November, then promised to phase in cuts of about 300,000 barrels a day and, according to OPEC data, cut about 30,000 barrels a day in January. Russia is now pumping more oil than in August, and the price is higher now, thanks in large part to nonexistent but loudly announced “unprecedented” Russian cuts in sync with OPEC.

Because of the production cut agreement -- or, rather, all the noise around it -- major oil-producing nations may get a little budgetary security this year. The current price is still below the fiscal break-even level for Saudi Arabia and Russia -- meaning the level at which these countries can balance their budgets without devaluing the national currency -- as calculated by the International Monetary Fund late last year. But both countries have realistic borrowing plans, and Russia at least has budgeted for cheaper oil, so it will enjoy some flexibility. Other countries, such as Iran and Iraq, can balance their budget at the current prices.

Obviously, the major powers behind the production cut story, Saudi Arabia and Russia, wouldn’t mind an even higher price, but given the physical market situation, they’ve probably squeezed the hype for all they could. They should be grateful to US frackers for increasing production only modestly as the price rose; according to the US Energy Information Agency, the country’s crude output increased by some 280,000 barrels a day since the end of November. So far, OPEC and its situational allies can produce louder noise with the cuts: Their numbers sound more impressive.

What if the US shale industry tries to break production records established in mid-2015 (before they led to frantic pumping by the Saudis and Russians forcing prices down, which sent a number of US firms into bankruptcy)? Eventually, the magic of the OPEC cuts will wear off and the US news will take center stage. Prices will slide again, since they follow narratives, not supply and demand. OPEC and Russia will need to pump more oil to meet budgets. The vicious circle will repeat itself, with frackers suffering more losses and the authoritarian oil regimes needing to spin some positive news again to get back to an acceptable price level.

Eventually, the shortage of long-term investment in the oil industry, driven by the price crisis of 2014-2016, is likely to start weighing heavily on all major players’ ability to increase production at will. Discoveries of oil and gas fields were at a 60-year low in 2016, and it‘s unlikely that new energy sources will reduce the oil demand dramatically before this becomes a problem. Meanwhile, the oil nations and the frackers will just need to keep playing the current cat-and-mouse game to entertain speculators and keep prices at an acceptable level.

By Leonid Bershidsky
Bloomberg

Leonid Bershidsky is a Bloomberg View columnist. -- Ed.