OPEC will likely extend output deal, analysts say
Other options too painful for Saudis
CALGARY • The continued slide in oil prices is placing increased pressure on key OPEC members to once again intervene in the market and extend the production cuts they had initiated at the start of the year.
Futures contracts f or West Texas Intermediate fell again on Thursday below US$48 per barrel, touching a four-month low of US$47.30 on concerns over high U. S. storage levels. Brent crude also slipped in Thursday trading to just above US$50.
Market sentiment is also being hurt by analysts revising their price outlook to accommodate rising U. S. shale production. Tudor, Pickering, Holt & Co., a Houstonbased i nvestment bank, lowered its 2018 outlook for WTI by $ 10 to US$ 65. Barclays analysts, for their part, predict oil prices will remain in the mid- US$ 50 range in the second half of 2017.
Other analysts have trimmed their estimates for 2017 to below US$ 60 by the end of the year. U.S. oil producers, meanwhile, are expected to boost output by 1.2 million bpd over the year, according to Tudor, Pickering, Holt & Co.
The slide in price and surging non- OPEC output has heaped pressure on OPEC members, particularly key producer Saudi Arabia, who agreed to cut production last November in an attempt to lift oil prices.
The agreement to curb supplies initially sent prices above the US$50 level, calming investors. But recent price reversals will complicate discussions when the cartel meets in Vienna on May 25 to discuss whether it will extend its production quotas for another six months. The original sixmonth agreement expires in June. OPEC and non- OPEC members are meeting this weekend in Kuwait to assess compliance of the agreed 1.8 million bpd cuts.
RBC Capital Markets analyst Helima Croft said she expects OPEC to extend the cuts, as fears of a collapse in oil prices override concerns over a loss of market share.
When OPEC met in November to discuss the production cut, many members were struggling to contain growing civil unrest as falling oil revenues forced them to slash spending on social programs and other subsidies. “These guys encountered US$ 26 per- barrel oil in January — they were worried about losing power,” Croft said by phone from New York. “There was a view heading into that November meeting that if they didn’t take action they’d be in the US$30s again.”
Other analysts also think OPEC will extend the agreement.
Citi Group expects an extension “because the other option would be too painful for the Saudis and all others in the deal.... By that criterion it’s a done deal and the cuts get extended.”
In an i nter vi ew with Bloomberg News last week Saudi Energy Minister Khalid Al- Falih said the cuts would be extended if crude stockpiles in June were above their five- year aver- age. Meanwhile, Saudi royals are banking on much higher prices for the IPO of its massive state- run oil giant Saudi Aramco, which they say is scheduled for 2018. On Wednesday, Saudi Arabia also suffered a credit downgrade from Fitch Ratings to A+ on worsening public and external finances on the back of l ower oil prices.
The cartel also has other headaches to contend with. Despite compliance being well above analyst expectations, OPEC member Iraq is causing concern over whether it will meet its respective targets.
The country has said it is counting exports rather than production as its key metric within the quotas, which goes against t he OPEC agreement. Iraq has boosted its production, while OPEC members Libya and Nigeria, which are exempt from the cuts, have also increased output.
Croft said much of the uncertainty around Iraq production levels is due to a lack of consistency between heads of state and the energy ministry. However in Iraq, as elsewhere, she says leaders are still primarily concerned with avoiding another price rout, which should be supportive of an extension of the OPEC deal.
“Oil ministers talk about how this is all about fundamentals, not about price, but from the standpoint of the people running these countries I think they are very concerned about price,” she said.
IF THEY DIDN’T TAKE ACTION THEY’D BE IN THE US$30S AGAIN.