Get­ting rid of the glut

The oil price will rise, the mar­ket will tighten and com­pa­nies and coun­tries will re­cover eco­nomic losses – if the oil mar­ket cuts the glut.

Finweek English Edition - - THE OPTIMIST’S GUIDE: OIL - By Lloyd Gedye ed­i­to­rial@fin­

the best- case sce­nario for oil in 2017 is that the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries (Opec) and non­mem­ber coun­tries re­main fully com­mit­ted to the cuts in pro­duc­tion an­nounced af­ter its 30 Novem­ber meet­ing. Richard Robin­son, in­vest­ment man­ager at Ash­bur­ton In­vest­ments, says that de­spite Opec’s im­age in the me­dia, it has his­tor­i­cally achieved fairly high lev­els of com­pli­ance (85%) when pre­vi­ous cuts had been im­ple­mented.

“Al­though we be­lieve that the oil mar­ket is tight­en­ing and the in­ven­tory glut is go­ing to re­duce over the next year, the fast-for­ward­ing ef­fect that an Opec cut will have on this is un­doubt­edly positive for the 2017 oil price sce­nario,” says Robin­son. “The way in which Opec even­tu­ally an­nounced the deal and its struc­ture sug­gests that they have re­gained much of their lost cred­i­bil­ity.”

Robin­son sug­gests that this is most ev­i­dent in Saudi Ara­bia con­ced­ing mar­ket share to Iran and al­low­ing it to grow pro­duc­tion by 190 000 bar­rels a day. Over­all, Opec has com­mit­ted to a 1.2m bar­rel-a-day cut, the first such agree­ment since 2008.

“We also be­lieve that the ar­chi­tect of this cut, Saudi Ara­bia, which is tak­ing on most of the share of the cut, is des­per­ate to evoke a higher oil price as its econ­omy is strug­gling,” says Robin­son.

“Com­pli­ance is the key to whether they re­gain full cred­i­bil­ity. How­ever, we see a high like­li­hood of solid com­pli­ance due to the fact that Opec spare ca­pac­ity is low and thus the op­por­tu­nity to cheat is also low as many of the Opec coun­tries, we be­lieve, are op­er­at­ing at or near full ca­pac­ity.”

Robin­son be­lieves fur­ther cuts could be on the cards. “Over the his­tory of Opec cuts, they have on av­er­age cut by 4.1m bar­rels a day. The last cut they embarked on was 3m bar­rels a day be­tween 2008 and 2009. They may con­sider do­ing this in or­der to nor­malise in­ven­to­ries be­fore US pro­duc­tion hits the mar­ket.” NonOpec mem­bers agreed to a 558 000 bar­rel-aday cut in early De­cem­ber.

Good news for African oil pro­duc­ers

PwC Africa Oil & Gas ad­vi­sory leader Chris Bre­den­hann says the cut an­nounced at the end of Novem­ber was good news for Africa’s oil pro­duc­ers.

“Nige­ria and An­gola have re­ally strug­gled with the low oil price,” says Bre­den­hann, and adds that In­vest­ment man­ager at Ash­bur­ton In­vest­ments Daugh­ter of An­golan pres­i­dent José Ed­uardo dos San­tos Opec was sen­si­tive to these coun­tries’ plights and thus ex­empted them from the cut. Nige­ria has been the coun­try worst af­fected in sub-Sa­ha­ran Africa. It has seen a sharp de­cline in crude ex­ports, while An­gola had to re­vise its budget in 2015 due to low oil prices, cut­ting pub­lic spend­ing by $414bn. An­golan inflation hit 40.04% year-on-year in October and spec­u­la­tion of cor­rup­tion is rife af­ter Pres­i­dent José Ed­uardo dos San­tos ap­pointed his daugh­ter Is­abel dos San­tos to run the state oil com­pany.

The US needs a higher oil price

Oil prices im­me­di­ately spiked af­ter the an­nounce­ment of the cuts by Opec. A higher oil price is good news for US oil pro­duc­ers, who have been hit hard by the low oil prices in 2016, with many fil­ing for bank­ruptcy. Some an­a­lysts are ar­gu­ing that this tough pe­riod had made the US com­pa­nies more re­silient, forc­ing them to stream­line their oper­a­tions while search­ing for ef­fi­cien­cies. They ar­gue that now, as they be­come more vi­able again due to a higher oil price, they will be fight­ing fit. How­ever, this re­mains to be seen. The US is fac­ing a fairly tu­mul­tuous po­lit­i­cal time as Don­ald Trump pre­pares to be­come pres­i­dent. What will Trump’s term de­liver on the en­ergy front? Dur­ing the US elec­tion cam­paign Trump promised pro­tec­tion­ist trade poli­cies and the re­vival of fos­sil fu­els. He said he was in favour of re­mov­ing oil sec­tor reg­u­la­tions and al­low­ing com­pa­nies to drill for oil on fed­eral land. Whether he de­liv­ers on these cam­paign prom­ises will have its own com­pli­ca­tions for the oil sec­tor. Re­cently, Damien Cour­valin of Gold­man Sachs fore­cast $55 per bar­rel for the first half of 2017, an up­date on the ear­lier fore­cast of $45 to $50 per bar­rel. Fitch says it ex­pects oil prices to flat­line in 2017, av­er­ag­ing $45 per bar­rel, be­fore mov­ing up grad­u­ally af­ter that. It is fore­cast­ing a $55 per bar­rel oil price for 2018 and a $60 per bar­rel oil price in 2019. Fitch at­tributes this to the high global oil in­ven­to­ries and the po­ten­tial for US shale pro­duc­tion to re­spond quickly to any tight­en­ing of the mar­ket.

Is­abel dos San­tos

Richard Robin­son

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