Opec can celebrate, for now at least Vienna decision to be big boon for LNG market
ENFORCING COMPLIANCE: Lingering problems persists, say analysts
LET Organisation of the Petroleum Exporting Countries (Opec) celebrate. For now.
The oil club is dizzy with its own success after a harmonious meeting, here, where it surprised the world by agreeing to its first production cut in eight years.
Oil prices up 10 per cent? Check. Saudi Arabia and Iran in agreement? Check. Opec and Russia working together? Check. After being left for dead, Opec pulled it off once again.
In hurried notes just hours after the end of the meetings, analysts joined the party. “Opec resurrection,” Neil Beveridge at Sanford C. Bernstein & Co called it. “Opec is back,” opined Martijn Rats of Morgan Stanley. “Opec in the driver’s seat,” trumpeted Tudor, Pickering, Holt & Co.
Leave it to Abhishek Deshpande of Natixis in London to take away the punch bowl. “Opec returns,” he said, “but be wary.”
Deshpande, though a party-pooper, is correct that there are many reasons not to get too delirious about the agreement to curtail output by 1.2 million barrels a day, the most prominent being the cheating of Opec’s own members.
But for now, an industry that’s endured the most painful downturn in a generation is too busy clinking glasses to the latest from the S&P 500 Energy Sector Index, which surged on Wednesday more than five per cent to its highest in a year and a half.
But it’s Opec itself that will benefit most from the negotiated peace.
Amrita Sen, chief oil analyst at Energy Aspects Ltd in London, said that “even allowing for some cheating” the deal will turn an expected increase in inventory in the first half of 2017 into the opposite. That, in turn, should push up oil prices.
Opec officials have expressed the hope that by midnight on the last day of this year, oil will be approaching US$60 (RM267.67) a barrel.
Now for the “be wary” part. For all its success here, Opec is far from resolving its lingering problems. For one, the agreement depends on selfcompliance, and the commitment to cut from key countries, particularly Iraq, is weak. Iran, which was allowed a production increase but agreed to cap it at 90,000 barrels a day, is also showing signs it could go rogue.
“Disagreements persist among Opec members on how to measure production, so the deal will be hard to police,” said Spencer Welch, a director at consultant IHS Energy.
Saudi Arabia and its Persian Gulf allies, the United Arab Emirates and Kuwait, have traditionally stuck to their promises to cut. But others haven’t, particularly when prices are low. Sceptical traders believe that after a couple months of cuts, cashstrapped Venezuela and Angola will be boosting production to cash in on higher prices.
Reductions by non-Opec countries such as Russia and Mexico, which agreed to cut nearly 500,000 barrels a day, look more like production freezes and natural declines rather than genuine voluntary compliance.
Higher oil prices could also weaken demand growth in 2017, muting the benefits of lower production. And global inventories are at record levels. As prices rise, traders will slowly release stocks, dampening the agreement’s intended effects.
And in a classic case of an unintended consequence, a surprise winner could be Opec’s nemesis: United States shale.
American producers, whose destruction Opec tried to hasten with its “pump-at-will” policy in late 2014, are poised to flourish. Already, Continental Resources Inc, the company founded by Donald Trump adviser Harold Hamm, gained as much as 25 per cent on Wednesday, the most since 2008, a time when oil, at US$150 a barrel, cost approximately three times what it does today. Bloomberg VIENNA: The decision by Organisation of the Petroluem Exporting Countries (Opec) to shrink oil production is both a blessing and a curse for natural gas markets.
It’s bad news for the United States gas bulls enjoying a rally that has propelled prices to the highest in two years. Crude explorers have more incentive to drill with oil futures surging on the promised cuts by Opec. And with every barrel of oil they pull out of the ground, they’ll inevitably pull out gas, a byproduct that threatens to add to a US supply glut that’s already hit a record.
“These guys will drill more, and you are going to get that extra gas at an inconvenient time,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “It’s bearish for US gas for the next threeto nine-month window.”
While the potential flood of socalled associated gas threatens to derail the rally in US gas prices, it also stands to be a boon for the liquefied natural gas (LNG) market. A large share of LNG contracts are linked to benchmark oil futures. And a drop in US gas prices will allow the nation’s LNG exporters to offer supplies to the world at a deeper discount.
In fact, Golar LNG Ltd, which owns floating LNG terminals, rallied as much as 16 per cent.
Cheniere Energy Inc., which became the first exporter of US shale gas by tanker in February, jumped as much as 8.2 per cent on Wednesday, reaching a six-week high.
Meanwhile, in Russia is ready to “gradually” cut its oil production by up to 300,000 barrels per day in the first half of next year as a part of its agreement with Opec, said Russian Energy Minister Alexander Novak.
But he gave no indication what is the level that Russia is ready to cut its oil output from. This year Russia's crude output is on track to hit a new post-Soviet high. Agencies