The Nov. 30 agreement by members of the Organization of Petroleum Exporting Countries to collectively cut production delivered a jolt of excitement amongst traders and resulted in an accompanying spike in crude oil prices during the week ended Dec. 2 (OGJ Online, Nov. 30, 2016).
Brent crude on Dec. 1 settled at its highest level since August 2015 as optimism that a 1.2 million-b/d output reduction by the oil cartel would accelerate a rebalancing of the global market. However, the upward momentum eased on Dec. 2 as some market observers continued to question the efficacy of the deal given past failed OPEC agreements (OGJ Online, Dec. 1, 2016).
Hans van Cleef, senior energy economist for ABN AMRO Bank NV, Amsterdam, noted that while “reaching an agreement was already quite a struggle, bringing this to practice will be an even greater challenge.”
Van Cleef explained that several OPEC members struggle to reduce output even though their fiscal budgets are based on higher oil prices, and noted the “risk that higher oil prices would trigger a rise in non-OPEC crude production—mainly US shale oil—which would lead to a shift in market share rather than a sustainable higher oil price.”
ABN AMRO forecasts higher oil prices in 2017 as the market heads toward balance regardless of whether or not the deal is carried out. It notes that global demand is expected to rise 1.2 million b/d in 2017 and non-OPEC supply is likely to remain constrained by a lack of investment due to low prices.
Van Cleef nevertheless believes “a deal may speed up the process of shifting towards a balance, bringing oil prices towards $60/bbl next year.”
ESAI Energy LLC cautions that production gains in Libya and Nigeria should be considered when accounting for the agreed-upon reduction target. The research and forecasting firm said the two OPEC members could add a combined 550,000 b/d between November and the end of first-quarter 2017, which “cuts the utility of this agreement down to about 600,000 b/d.”
A study published last week by research and consulting firm Wood Mackenzie Ltd. indicates Libya has doubled its oil production to near 600,000 b/d since early September (OGJ Online, Nov. 23, 2016).
Also to be considered, ESAI said, is Indonesia’s suspended OPEC membership that reduces the cumulative production limit to 32 million b/d. Given the Nigerian and Libyan gains, the firm estimates OPEC production in first-half 2017 will average 32.4 million b/d.
“By the third quarter, all other things held equal, a renewal of the agreement would clearly lead to a supply-demand deficit,” ESAI said. “This will certainly lift crude oil prices in the second half of 2017, and it will encourage higher prices in the interim, especially if these promises all come to pass.”
Market observers now anticipate Baker Hughes Inc.’s midday Dec. 2 release of its US rig count, movement of which has implications on future non-OPEC supply. As of the Thanksgiving holiday shortened week ended Nov. 23, the tally of active US oil-directed rigs had risen by 158 since May 27 (OGJ Online, Nov. 23, 2016).
Energy prices
Both the January and February crude oil contracts on the New York Mercantile Exchange gained $1.62 on Dec. 1 to close at $51.06/bbl and $51.96/bbl, respectively.
The natural gas contract for January jumped 15.3¢ to a rounded $3.51/MMbtu. The Henry Hub spot market for natural gas closed at $3.42/MMbtu, up 13¢.
Heating oil for January climbed 7.16¢ to a rounded $1.65/gal. Reformulated gasoline stock for oxygenate blending for December increased 6.45¢ to a rounded $1.55/gal.
The average price for OPEC’s basket of benchmark crudes on Dec. 1 surged $4.55 to $49.35/bbl.
Contact Matt Zborowski at [email protected].
