Deal im­ple­men­ta­tion key to near-term oil price trend

Kuwait Times - - BUSINESS -

KUWAIT: Oil prices surged to a 17-month high level af­ter the suc­cess­ful out­come of the much-awaited meet­ing be­tween OPEC mem­bers dur­ing the last week of Novem­ber-16 fol­lowed by the De­cem­ber-16 agree­ment with non-OPEC pro­duc­ers. As per our ex­pec­ta­tions in our Novem­ber-16 re­port, the pro­duc­tion cut agreed be­tween OPEC mem­bers is sig­nif­i­cantly more than the Septem­ber16 agree­ment. More­over, as we had ex­pected, non-OPEC mem­bers have also agreed to take part in the mu­tu­ally ben­e­fi­cial agree­ment.

Ac­cord­ing to the two out­put cut agree­ments within the OPEC and with non-OPEC mem­bers, a to­tal of 1.8 mb/d of crude oil has been de­cided to be cur­tailed start­ing next month by global oil pro­duc­ers. This is ex­pected to help push oil prices up­wards as well as ease the pres­sure on oil in­ven­to­ries that re­mains at his­tor­i­cal high lev­els. The mar­ket was fur­ther shocked when Saudi Ara­bia sig­naled deeper cuts to its oil pro­duc­tion af­ter eleven non-OPEC pro­duc­ers in­clud­ing Rus­sia and Kaza­khstan agreed to slash pro­duc­tion by close to 0.56 mb/d.

In terms of the time­frame, OPEC said that the oil mar­ket would not re­bal­ance un­til the 2H-17 as a re­sult of a de­cline in oil in­ven­to­ries af­ter the pro­duc­tion agree­ment. How­ever, IEA’s lat­est ex­pec­ta­tions were rel­a­tively more op­ti­mistic as the agency now ex­pects a sup­ply short­fall dur­ing 1H-17 but said that the next few weeks af­ter the im­ple­men­ta­tion of the new plan would be cru­cial to de­ter­mine its ef­fec­tive­ness on the oil mar­ket owing to con­trac­tual and lo­gis­ti­cal rea­sons. IEA also raised its fore­cast for de­mand in 2016 and 2017 af­ter re­vis­ing es­ti­mates for Rus­sian and Chi­nese de­mand.

Crude oil price surged more than 17 per­cent since the end of Novem­ber-16 and with the op­ti­mism re­lated to lower pro­duc­tion, some oil watch­ers are spec­u­lat­ing an oil price of $ 60/b in 2017 fol­lowed by $ 70/b in the fol­low­ing year. How­ever, in its short term en­ergy out­look, the EIA has fore­casted an av­er­age oil price of $ 52/b in 2016 af­ter con­sid­er­ing the afore­men­tioned agree­ments. Av­er­age OPEC crude price de­clined by 9.7 per­cent dur­ing Novem­ber-16 to $ 43.2/b af­ter a dou­ble digit surge dur­ing the pre­vi­ous month as the op­ti­mism about the afore­men­tioned deal started wan­ing. How­ever, prices surged to­wards the end of the month and in De­cem­ber-16 push­ing av­er­age prices for the first two weeks of this month by 18 per­cent to $ 51.0/b. Price of Kuwait Crude broke the $ 50/b ceil­ing dur­ing the first week of this month for the first time since July-15.

KAMCO Re­search be­lieves that an oil price of over $ 50/b would trig­ger ad­di­tional out­put from US shale pro­duc­ers as seen in the past few weeks and would partly off­set the ex­pected im­pact of the OPEC agree­ment. This would push mar­ket re­bal­anc­ing to late 2017 as against more op­ti­mistic fore­cast from some agen­cies. We see a price range of $ 55/b - $ 65/b over the next cou­ple of years as op­po­site forces of shale vs. OPEC keep prices within this tight range.

Oil prices reached a 17-month high level of $ 53.24/b of OPEC crude af­ter two con­sec­u­tive suc­cess­ful meet­ings held for curb­ing oil out­put. The first meet­ing held dur­ing the last week of Novem­ber-16 be­tween OPEC mem­bers de­cided to slash OPEC out­put by 1.2 mb/d start­ing Jan­uary-17 as against a much lower cut of 0.7 mb/d de­cided dur­ing the Septem­ber-16 meet­ing in Al­ge­ria. In the next meet­ing held dur­ing the sec­ond week of De­cem­ber16, OPEC and non-OPEC mem­bers agreed on a global pact, the first deal in over 15 years, to slash non-OPEC out­put by 0.56 mb/d spread across 11 non-OPEC pro­duc­ers. Of this, the largest cut was taken by Rus­sia at 0.3 mb/d (0.2 mb/d in Q1-17 and 0.3 mb/d in Q2-17) fol­lowed by Mex­ico at 0.1 mb/d. More­over, against a back­drop of poor im­ple­men­ta­tion by both OPEC and non-OPEC mem­bers, Rus­sia an­nounced that it will form a work­ing group to mon­i­tor the vol­un­tary out­put cut by its oil com­pa­nies. On the other hand, Saudi Ara­bia has also pledged a high level of com­pli­ance by OPEC mem­bers to the agreed out­put cut.

Mean­while, a strength­en­ing $ had a neg­a­tive im­pact on oil prices over the past few months partly off­set­ting the op­ti­mism re­lated to the ex­pected re­duc­tion in out­put. The green­back reached a 14-year high level af­ter the US Fed raised bench­mark in­ter­est rates by 25 ba­sis points on 14-De­cem­ber-16. On the other hand, a new record OPEC out­put in Novem­ber-16 also lim­ited the growth in oil prices dur­ing De­cem­ber-16. Fur­ther­more, US shale out­put con­tin­ues to rise in light of in­creas­ing oil prices. US oil rig count is now close to 500, af­ter it surged the most in 31 months and in­creased by 21 to a 10-month high level of 498, ac­cord­ing to the lat­est weekly update from Baker Hughes.

On the con­sump­tion front, IEA raised its oil de­mand fore­cast for the cur­rent year and for 2017. The agency ex­pects oil de­mand growth of 1.4 mb/d for 2016, an in­crease of 120 tb/d as com­pared to its pre­vi­ous fore­cast. De­mand growth in 2017 is also 110 tb/d more than the agency’s pre­vi­ous es­ti­mate and is now ex­pected to reach to 1.3 mb/d.

World Oil De­mand

OPEC raised its world oil de­mand growth ex­pec­ta­tions for 2016 slightly by 11 tb/d in its lat­est monthly re­port to 1.24 mb/d to re­flect bet­ter-than-ex­pected oil con­sump­tion in OECD Europe and Asia Pa­cific. Global oil de­mand is ex­pected to reach 94.41 mb/d this year pri­mar­ily on the back of a ro­bust trans­porta­tion sec­tor in light of low oil prices that has re­sulted in bet­ter-than-an­tic­i­pated ve­hi­cle sales. De­mand is ex­pected to grow in al­most all the re­gions, with the ex­cep­tion of Latin Amer­ica and Mid­dle East due to the de­cline in eco­nomic ac­tiv­ity and sub­sti­tu­tion ef­fect. Ac­cord­ing to the lat­est monthly data for US for Septem­ber-16, oil de­mand grew year on year for all the prod­uct cat­e­gories, ex­cept diesel due to lower in­dus­trial ac­tiv­ity. Gaso­line and jet fuel de­mand in­creased by 2.2 per­cent and 5.9 per­cent y-o-y, re­spec­tively, on the back of higher trans­porta­tion and in­creas­ing mileage and grow­ing travel-re­lated ac­tiv­ity. Based on pre­lim­i­nary data for October and Novem­ber-16, US oil de­mand is es­ti­mated to have in­creased by 0.31 mb/d. Oil de­mand also in­creased in OECD Europe on the back of eco­nomic growth and the low oil price en­vi­ron­ment that sup­ported oil con­sump­tion in the road trans­porta­tion sec­tor.

In the other Asia re­gion, In­dia con­tin­ued to record strong oil de­mand in October-16 at around 6.5 per­cent yo-y. The solid eco­nomic growth in In­dia has pushed oil de­mand for YTD-16 at above the 5-year av­er­age level. How­ever, we ex­pect de­mand to take a hit for the re­main­der of the year and in early 2017 in In­dia due to the de­mon­e­ti­za­tion ini­tia­tives im­ple­mented in the coun­try since early Novem­ber-16. The Mid­dle East re­gion con­tin­ues to record de­clin­ing oil de­mand, es­pe­cially in Saudi Ara­bia that recorded y-o-y de­cline for eight out of ten months in 2016, due to a de­cline in con­sump­tion of di­rect crude for burn­ing.

For 2017, oil de­mand is ex­pected to grow at a slightly lower pace of 1.15 mb/d, in line with OPEC’s pre­vi­ous month’s ex­pec­ta­tions, and av­er­age at 95.56 mb/d. The growth would pri­mar­ily be driven by im­prov­ing de­mand in Latin Amer­ica and the Mid­dle East as the eco­nomic growth im­proves, while in the OECD, Amer­i­cas is also ex­pected to see higher oil de­mand par­tially off­set by flat de­mand in Europe and a weak­ness in Asia Pa­cific.

World Oil Sup­ply

Non-OPEC sup­ply ex­pec­ta­tions for 2016 was kept un­changed by the OPEC and is ex­pected to contract by 0.78 mb/d to reach year-end sup­ply ex­pec­ta­tion of 56.2 mb/d. The only change in the De­cem­ber-16 re­port was made to sup­ply from Rus­sia with a Q3-16 sup­ply re­duc­tion of 0.03 mb/d and an equiv­a­lent in­crease for Q4-16 thereby keep­ing full year sup­ply from Rus­sia at 11.05 mb/d.

On the other hand, sup­ply growth ex­pec­ta­tions for 2017 were raised by 70 tb/d and is now ex­pected to grow by 0.3 mb/d to av­er­age at 56.5 mb/d. Again in 2017 fore­casts, the change was only re­lated to sup­ply from Rus­sia. Ac­cord­ing to OPEC es­ti­mates, the key pro­duc­ers that are ex­pected to in­crease sup­ply in 2017 in­cludes Brazil (+0.25 mb/d), Kaza­khstan (+0.21 mb/d), Canada (+0.17 mb/d), Rus­sia (+0.08 mb/d), Congo (+0.07 mb/d) and Ghana (+0.04 mb/d) whereas Mex­ico, the US, China, Colom­bia, and Azer­bai­jan are ex­pected to show the steep de­clines. Mean­while, oil sup­ply from the US is ex­pected to jump sig­nif­i­cantly next year on the back of the on­go­ing in­crease in rig count. Ac­cord­ing to Platts Rig Data, rigs in op­er­a­tion in the US is ex­pected to av­er­age at 579 in 2017, an in­crease of 29 per­cent as com­pared to the ex­pected av­er­age for this year. New wells are also ex­pected in­crease by 25 per­cent next year, ac­cord­ing to the es­ti­ma­tor. In ad­di­tion, the new pres­i­dent elect’s ex­pected pro-frack­ing stand to sup­port em­ploy­ment is seen has giv­ing a boost to oil in­dus­try in the US, al­though the de­tails would only be re­vealed next year when the re­lated poli­cies are an­nounced by the new govern­ment.

OPEC Oil Pro­duc­tion & Spare Ca­pac­ity

OPEC pro­duc­tion reached another high in Novem­ber16 recorded at 34.16 mb/d, ac­cord­ing to Bloomberg, on the back of higher pro­duc­tion in An­gola, Libya and Nige­ria with the three OPEC mem­bers adding 310 tb/d dur­ing the month. This growth was par­tially off­set by a de­cline in pro­duc­tion pri­mar­ily in Venezuela and Saudi Ara­bia show­ing a com­bined de­cline of 110 tb/d. The se­condary sources of OPEC shows a smaller in­crease dur­ing Novem­ber-16 at 151 tb/d to av­er­age at 33.87 mb/d. Ac­cord­ing to Thom­son Reuters, crude ex­ports from OPEC in­creased at a much faster pace than pro­duc­tion with a rise of 580 tb/d m-o-m in Novem­ber-16 to reach 25.93 mb/d. The in­crease was pri­mar­ily on the back of higher ex­ports from Nige­ria and Libya. On the other hand, Iran recorded a steep de­cline of around 400 tb/d to reach 2.2 mb/d in Novem­ber-16, whereas Saudi Ara­bia ex­ports de­clined by 72 tb/d. The pro­duc­tion cut agree­ment agreed upon be­tween OPEC mem­bers pri­mar­ily puts the onus on Saudi Ara­bia to take the bulk of the cuts which is ex­pected to to­tal at 1.2 mb/d. Ac­cord­ing to the agree­ment, which would be im­ple­mented start­ing from Jan­uary-17, Saudi Ara­bia would cut its pro­duc­tion by 486 tb/d to 10.06 mb/d as com­pared to the cur­rent level of 10.53 mb/d (Novem­ber-16). The sec­ond largest cut is ex­pected to have been taken by Iraq at 210 tb/d to a pro­duc­tion level of 4.35 mb/d. The coun­try pro­duced at 4.58 mb/d dur­ing Novem­ber-16. UAE is also ex­pected to take a siz­able cut to its pro­duc­tion pegged at 139 tb/d to reach 2.87 mb/d.

Coun­tries that are ex­empt from the agree­ment in­clude Nige­ria, Libya due to the pro­duc­tion dis­rup­tion in these coun­tries and In­done­sia. Nige­ria is yet to reach its pro­duc­tion ca­pac­ity of 2.2 mb/d al­though the coun­try has re­cov­ered some of its lost ca­pac­ity over the past few months to reach a pro­duc­tion level of 1.68 mb/d.

The six-month agree­ment is seen as a ma­jor boost to the world oil mar­ket, how­ever, the tem­po­rary lid on the oil taps would be closely watched as OPEC pro­duc­ers con­tinue to add new oil rigs by an­nounc­ing new con­tracts. More­over, none of the pro­duc­ers have an­nounced a cut to their long-term oil pro­duc­tion tar­gets.

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.