US and London crude oil benchmarks both soared by more than $4/bbl on the New York and London markets Nov. 30 after the Organization of Petroleum Exporting Countries announced an agreement for the cartel to reduce production to 32.5 million b/d effective next year (OGJ Online, Nov. 30, 2016).
The agreement also calls for certain non-OPEC producers to cut production 600,000 b/d, of which OPEC expects Russia to cut production 300,000 b/d. A meeting between OPEC and non-OPEC producers is scheduled for Dec. 9.
Barclays analysts issued a research note saying OPEC might find it difficult to compile 600,000 b/d of non-OPEC producer cuts.
“Based on our most recent balances, we expect several producers, including Mexico, Azerbaijan, and Colombia to show declines next year,” said Miswin Mahesh of Barclays in London. “Other producers…are likely to show declines as well. Those countries include Thailand, Vietnam, Egypt, China, and India.”
OPEC agreed to cut cartel production by roughly 1.2 million b/d. Barclays said OPEC has attempted to put a new floor under prices but that it has provided “fuzzy math” in outlining the production adjustments.
Mahesh said he was “highly skeptical that Iraqi and Iranian output will be lower” in first-quarter 2017. OPEC said Saudi Arabia agreed to cut by 486,000 b/d, Iraq by 210,000 b/d, and Iran 178,000 b/d.
Analysts with Fitch Ratings said the agreement has not changed Fitch’s view on long-term oil prices. “Significant risk remains that OPEC members will produce crude above quotas as has happened in the past. This could slow market rebalancing,” Fitch said in a note from its Moscow and London offices. “Another unknown is how quickly the US short-cycle crude production will react to higher oil prices. US shale production has already begun to bounce back from recent lows, and may accelerate at prices above $50/bbl.”
Andrew Slaughter, Deloitte Center for Energy Solutions executive director, said crude oil inventory levels are more than 300 million bbl above historical ranges.
“If OPEC cuts to the full amount announced and maintains those cuts for an extended period, the inventory overhang could be largely brought down to historical levels by August of 2017,” Slaughter said. “Even if OPEC cuts are not fully followed through, inventory reductions would still be accelerated relative to the situation if OPEC did not make production cuts.”
Slaughter said if only Saudi Arabia, UAE, and Kuwait made cuts, 75,000 b/d would come off the market. “The inventory overhang would be largely eliminated by early 2018,” he said.
Energy prices
The January crude oil contract on the New York Mercantile Exchange escalated $4.21 on Nov. 30 to close at $49.44/bbl. The February contract jumped $4.21 to $50.34/bbl.
The natural gas contract for January climbed nearly 4¢ to a rounded $3.35/MMbtu. The Henry Hub spot market for natural gas closed at $3.29/MMbtu, up 26¢.
Heating oil for December rose 11¢ to a rounded $1.57/gal. Reformulated gasoline stock for oxygenate blending for December gained 11¢ to a rounded $1.49/gal.
The Brent crude contract for January on London’s ICE was up $4.09 to $50.47/bbl. The February contract rose $4.52 to $51.84/bbl. The gas oil contract climbed $30.50 to $456/tonne.
The average price for OPEC’s basket of benchmark crudes on Nov. 30 was $44.80/bbl, up 93¢.
Contact Paula Dittrick at [email protected].