I was reading the latest OPEC report with great interest, in part because oil (NYSEARCA:USO) is a major determinant for many asset classes, and in part because oil price is a key factor for the industry of my special interest, offshore drilling. The news of an OPEC/non-OPEC deal has surely provided significant support for the oil market, but now oil will have to trade on facts rather than assumptions. The first fact check is neutral to slightly bearish, in my view.

OPEC producers generally followed their quota. They knew they should do it after they created so much fuss about the deal - otherwise, oil would be way below $50 per barrel. However, since it's winter in the Middle East, the real test of the OPEC members' dedication to the deal has not started.

OPEC's own view on the demand/supply balance in 2017 is probably more problematic than the challenge of switching air conditioning on in spring in the Middle East states. The cartel estimates that oil demand in 2016 was 94.62 mb/d and that it will rise to 95.81 mb/d in 2017. Whether demand will indeed be this strong is not as important because supply is a crucial factor. OPEC estimates that world oil supply in January fell by 1.29 mb/d to 95.82 mb/d. However, OPEC's estimate of demand is lower than that of IEA.

IEA believes that the current supply/demand situation implies a 0.6 mb/d draw from OECD inventories. As per latest OPEC report, OECD inventories were 299 mb/d above the five-year average. Thus, it would take 498 days to bring them back to normal.

In my view, this is the reason why Brent oil (NYSEARCA:BNO) consistently fails to go past $57.50 per barrel. Even if the current supply/demand balance causes decline in inventories, the pace is too slow. The inventory overhang will continue to plague the market for months if the current situation persists. The key question here is whether the increase in demand will outpace the increase in supply from the countries that are not part of the deal.

Should the balance remain in place, OPEC countries will lose their market share and have more incentive to cheat or abandon the deal. Another reason for concern is that speculative long positions are at very high levels:

This is a recipe for major downside if the fundamental data does not support the long thesis. I would like to highlight that this level of speculative activity was reached without additional upside in oil. Thus, the cumulative speculative buyer was met by a fundamental seller - most likely represented by mass hedging of oil producers.

In my view, significant uncertainty remains in the market. The longer Brent oil spends below $57.50, the bigger chances for a domino effect once it breaks below $53. Given the chance to hedge, the situation looks normal for oil producers, but much less so for services companies, especially offshore drillers, which will continue to experience low levels of contracting activity. Current data is not good enough for a major bull thesis. Thus, oil companies remain in a defensive mode, preferring short-cycle opportunities.

This year, we will see a divergence between the "survival group" - Rowan (NYSE:RDC), Diamond Offshore Drilling (NYSE:DO), Transocean (NYSE:RIG), Ensco (NYSE:ESV), and Noble Corp. (NYSE:NE) - and the restructuring group - Seadrill (NYSE:SDRL), Ocean Rig (NASDAQ:ORIG), Pacific Drilling (NYSE:PACD), and North Atlantic Drilling (NYSE:NADL). Seadrill Partners (NYSE:SDLP), which should get confirmation that it is not part of Seadrill restructuring, and Atwood Oceanics (NYSE:ATW), whose debt is not big but whose backlog is a major problem, lie somewhere in between the two groups.

The year 2017 will be very difficult fundamentally even for the "survival group." From oil majors' plans to the cartel's report - everything points to continued pressure on the offshore drilling market due to low oil prices and general uncertainty on the future price levels.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the abovementioned stocks.

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OPEC Report: Pressure On Offshore Drilling Remains - Seeking Alpha