According to a recent report by the Joint Organisations Data Initiative, Russia edged out Saudi Arabia as the world's largest oil producer in December. That was the first time the Russians had come out on top since March. Meanwhile, preliminary data compiled by Bloomberg for January showed an even wider gap between the two as Russian output appears to have come in well ahead of that of its Middle Eastern rival.

While this early data suggests Saudi Arabia is following through on its promised output cuts, it also implies that its primary partner in stabilizing the oil market might not be carrying its share of the workload. If that trend continues, the Saudis might need to reevaluate their plan, or risk disappointing the market, which could send crude prices plunging. If that happens, it could be bad news for oil stocks.

Oil pump in the winter snow.

Image source: Getty Images.

Drilling down into the data

During December, Russia's oil production averaged 10.49 million barrels per day, which is down 29,000 barrels per day from November. However, despite that slipping production, Russia still managed to reclaim the top spot from the Saudis. That's because output in the Gulf state sank to 10.46 million barrels per day in December, down from 10.72 million the prior month. These declines came despite that fact that both countries were under no obligation to restrict their output in December because the OPEC agreements to curb production didn't go into effect until the beginning of 2017.

That said, preliminary data for January shows a growing gulf between the two oil giants. Russia's production rose to 11.11 million barrels per day, which suggests it didn't put as tight a cap on production as it said it would. Russia pledged to reduce output by 300,000 barrels per day versus its planned level, but it only cut production by 118,000 barrels per day, according to Bloomberg's data sources. The Saudis, on the other hand, only produced 9.95 million barrels per day last month, implying that it cut output by 598,000 barrels per day last month, well ahead of the 486,000 barrel per day target. That helped OPEC achieve 90% compliance with its production cut despite the fact that all but two other members fell well short of their targeted cuts.

Land drilling rig at sunset.

Image source: Getty Images.

How this might affect oil stocks

While the oil market appears pleased that OPEC's compliance was around 90%, the fact that so many countries, including Russia, missed their targets is cause for concern. In fact, non-member compliance was less than 50% in part because of Russia's big miss. If these countries continue to fall short of their targets, it will take much longer for the oil market to drain its oversupply. Oil inventories in the U.S., for example, have been on the rise in recent weeks and topped 518.1 million barrels last week, which was above the upper limit of the average range for this time of year. If these inventories don't drain as expected, it could cause oil prices to decline.

That's why several industry participants have already called on OPEC to extend its planned production cuts past the current timeframe. Just this week, for example, Patrick Pouyanne, the CEO of French oil giant Total (NYSE:TOT) spoke in favor of an extension. The Total CEO said, "If they want really to have an impact on the market, which means to have the inventories going down because inventories are quite high, it will have to be extended beyond May." These calls for an extension will only grow louder if Russia and other participants don't comply with their pledges. 

The failure of Russia and others to fulfill their obligations are coming at a time when U.S. shale production is starting to ramp back up. Shale producers such as Pioneer Natural Resources (NYSE:PXD) and Devon Energy (NYSE:DVN) have already released growth-focused budgets to capture the benefits of an improving oil market. In Pioneer Natural Resources' case, it expects to spend $2.8 billion this year to operate 18 drilling rigs in the Permian Basin and restart its drilling program in the Eagle Ford. Those rigs should enable the company to drill enough wells to grow its production by 15% to 18% over last year's average. Meanwhile, Devon Energy expects to spend between $2 billion to $2.3 billion on drilling this year, which should fuel 13% to 17% oil production growth by the fourth quarter versus last year's final quarter.

If those new shale supplies meet stubborn inventories as a result of lackluster compliance, it could cause oil prices to tank. That situation might force shale producers to reevaluate their growth plans and cut spending, especially if their stock prices follow oil lower.

Investor takeaway

Saudi Arabia led the charge late last year to get fellow oil-producing countries to cut back on production during the first half of this year to help the market burn off the glut of oil sitting in storage around the world. While the Saudis have done more than their fair share, others, like Russia, haven't come close. If that trend continues, it could cause oil prices to dive, which might ruin the growth plans of shale producers. Needless to say, it's a situation oil investors need to keep an eye on, because the oil market is still too fragile to handle a major disappointment.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. The Motley Fool recommends Total. The Motley Fool has a disclosure policy.