En­ergy: OPEC re­sets the bar

BofA Mer­rill Lynch Global Re­search

Kuwait Times - - BUSINESS -

The big news is that, for the first time in eight years, OPEC agreed on Novem­ber 30 to cut its pro­duc­tion. Key non-OPEC na­tions (led by top-pro­ducer Rus­sia) are also par­ties to the agree­ment, a first since 1998. OPEC mem­ber na­tions will curb their out­put by 1.2 mil­lion bar­rels per day, oth­ers by 600,000 bar­rels per day. Coun­try al­lo­ca­tions and an in­de­pen­dent pro­duc­tion mon­i­tor­ing com­mit­tee are also part of the deal, so we ex­pect firmer com­pli­ance than for prior agree­ments.

Based on the OPEC an­nounce­ment, the global oil mar­ket should en­ter into a deficit as soon as Q1 2017. As such, we are keep­ing our 2017 fore­casts for Brent and WTI crude oil un­changed at $61 and $59 per bar­rel, re­spec­tively.

While we ex­pect an­nual global oil de­mand to grow (by an av­er­age of 1.2 mil­lion bar­rels a day), we still see down­side risks to our fore­cast. De­mand could de­cline if US in­ter­est rates move higher and if the Chi­nese yuan de­pre­ci­ates in a dis­or­derly fash­ion. Also, some OPEC na­tions or Rus­sia could break free of the agree­ment, or pro­duc­tion could rise faster than ex­pected in na­tions out­side of this un­likely al­liance.

Ris­ing US out­put

Our price ex­pec­ta­tion em­beds a se­quen­tial 500,000 bar­rels per day in­crease in US crude pro­duc­tion, rais­ing out­put to 9.2 mil­lion bar­rels a day by the end of 2017.

Nat­u­ral gas fore­cast

We see US nat­u­ral gas bal­ances tight­en­ing be­tween now and mid2018 on fall­ing pro­duc­tion and strong struc­tural de­mand growth. Our 2017 price fore­cast is $3.50 per mil­lion Bri­tish Ther­mal Units (BTUs), about 15 cents above the cur­rent for­ward curve. In the longer term, the Trump pres­i­dency presents some down­side risks prices as it could speed up pipe­line in­fra­struc­ture, al­low­ing for a faster sup­ply ex­pan­sion.

Spot LNG prices have de­cou­pled from Brent and may push lower even if oil prices con­tinue to re­cover, as a wave of sup­ply from US and Aus­tralia is un­der­way. Asian buy­ers have bought too much LNG on long-term con­tracts and will be sell­ing in the face of this largest sup­ply wave ever. EU and Asian spot LNG prices may even­tu­ally find sup­port on coal-to-gas switch­ing lev­els.

Coal has been one of the best per­form­ing com­modi­ties in 2016 as China coal pro­duc­tion has fallen steeply on man­dated re­duc­tion in min­ing days from the gov­ern­ment. The ther­mal coal price rally was ex­ac­er­bated by a num­ber of other fac­tors, in­clud­ing tight­ness in the met coal mar­ket. Pro­duc­ers are now restart­ing pro­duc­tion in re­sponse to prices, set­ting the stage for an­other leg down in prices next year.

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.