【RIGZONE】OPEC
Crude Cut Could Push Oil to $75 Per Barrel in 2017
by Deon Daugherty, Rigzone
Staff, Thursday, December 01, 2016
Following
months of global oil market angst,
OPEC has pledged to cut its production by almost 1.5 million barrels per day
(MMbpd) – a greater target than proposed when the cartel last met in Algeria.
OPEC
agrees to slice its oil production by more than 1 million barrels per day
beginning Jan. 1, raising market hopes and commodity prices.
This
first OPEC accord in eight years is designed to accelerate the rebalancing of a market that has shown some signs of
tightening. Inventories could reach equilibrium in as few
as six months, analysts say.
Critically,
analysts at Barclays said in a research note, market participants may price
this into their calculations before the actual inventories drop.
Barclays
said that as a result, oil prices could increase with the emergence of evidence
that the market is truly tightening.
“This
is not to say that the current environment is easy for the industry – it isn’t
– but with OPEC back and effective … it does appear that the worst of the
downturn has passed.”
Details
Of The Deal:
- OPEC
will reduce its production to 32.5 MMbpd – about 200,000 bpd more than
initially proposed.
- Saudi
Arabia will cut the most – about 40 percent of the total – which comes to
500,000 bpd.
- Iraq
will adjust down by 210,000 bpd.
- Russia,
coy throughout the discussions, appears to have come onboard with a cut of
300,000 bpd.
- No
specifics on waivers for Libya or Nigeria. Indonesia suspended its OPEC
membership.
- The
deal begins Jan. 1 and runs fox six months. Production levels will hold if
market conditions dictate it.
- A
meeting Dec. 9 will confirm non-OPEC participation.
The bottom line is this: A chop of almost 1.5 MMbpd
to volumes will get inventories down to normal levels by next summer, which
would grow confidence that oil could price at $75 per barrel in 2017, David
Pursell, Tudor Pickering Holt & Co. managing director, told investors.
What
matters most about the arrangement, Pursell said, is in its suppositions. The
Organization for Economic Cooperation and Development (OECD) inventories will
return to normal in the third quarter 2017 – if the deal holds. Oil prices will
respond quickly to OECD inventory declines. And, OPEC assigned a ministerial
committee to monitor implementation and ongoing volumes.
“Compliance
should be high, but naysayers will suggest OPEC will cheat,” Pursell said.
“History suggests that compliance is high initially and does erode over time as
oil prices increase.”
Vienna Sentiment
The International Energy Agency has estimated that
as a group, OPEC currently produces 33.8 MMbpd.
In the September meeting in Algiers, the cartel said member nations would target dropping
that volume between 32.5 MMbpd and 33 MMbpd.
Designed
to boost the oil market’s recovery, the production drop will “accelerate the ongoing drawdown of the stock overhang and
bring the oil market rebalancing forward,” OPEC said in a statement Nov. 30.
World
oil demand is expected to grow by about 1.2 MMbpd this year and in 2017. OPEC
said that underscores that a market rebalancing is underway, but both
Organization for Economic Co-operation and Development (OECD) and non-OECD
inventories remain well above average. Given the inventory overhang, a lack of
investment in 2016 and 2016, as well as massive industry layoffs, OPEC said
it’s vital that stock levels are brought down.
Is OPEC Back – Or – Did It Ever Leave?
Criticism
of OPEC and early decision to let the market work it’s will and rebalance
itself had reached a pitch that questioned whether the 56-year-old organization
could be relevant in the post-shale revolution market. That answer is mixed,
but largely, affirmative.
“Two
years later a much more cohesive OPEC has re-emerged as a force prepared to
call upon non-OPEC as well,” Barclays said.
But there are other issues to consider that may
alter OPEC’s scope. In the short term, how U.S. shale producers respond will be
a factor. The adherence of other non-OPEC producers can also have a role, said
Michael Burns, a global energy partner at Ashurst LLP.
Without a doubt, OPEC still has influence, Burns
said. And part of what makes this deal remarkable is that it shows the cartel
is willing to change course.
“The idea before was to produce as much as possible
and now, it’s not to produce as much as possible,” he said.
But ascertaining OPEC’s impact is weeks, months –
even years – away, Burns said, as normalized inventories move the level of oil
prices.
“If that level is enough for some of the shale
producers to make money, then they may well turn the taps on and you may see an
adjustment to the price,” he said. “It’s only then that we’ll be able to see
the power that OPEC has. To take the logic on, if shale depressed the price
again, then OPEC would have to cut further, and the question is, would they be
prepared to do that?”
The initial reaction from the oil market was to jump
about 8 percent – tantalizingly, just slightly above the $50 per barrel mark –
but it won’t necessarily last.
“It’s a big increase on a daily basis, but the point
is, that’s only back to the level it was when the conceptual deal was announced
in Algiers a couple of months ago,” Burns said. “I’m not sure that what is
happening here is going to make a remarkable difference going forward. But I
think it does hopefully give a bit of stability – at least in terms of knowing
where OPEC stands.”
Showing that OPEC is prepared to reduce supply sends
out a strong signal to give stability to prices.
“But I don’t think it gives the signal that we need
to see $70 prices tomorrow,” Burns said. “I suspect it may give stability for a
period rather than any rapid increase.”
This article is cited from:https://reurl.cc/E7vaVa