OPEC's recent press release regarding its Ministerial Monitoring Committee (JMMC) meeting held in Kuwait City suggests a production cut extension in May is very likely. Specifically, the JMMC noted that "certain factors, such as low seasonal demand, refinery maintenance, and rising non-OPEC supply, have slowed down the positive impact of the production adjustments on inventory drawdowns. However, the end of the refinery maintenance season and noticeable slowdown in U.S. stock build as well as the reduction in floating storage will support the positive efforts undertaken to achieve stability in the market," Although the JMMC's language is not exactly clear, it would seem that the committee is leaning towards recommending extending the output cut. Further, numerous OPEC Energy Ministers have recently expressed their support for an extension. Specifically, Algerian Energy Minister Nouredine Bouterfa recently told reporters an extension could benefit the market.
The JMMC plans to deliberate on whether a production cut extension is needed and will submit its recommendation to participating OPEC and Non-OPEC countries before the meeting in May. Further, the committee has asked the OPEC Secretariat to review oil market conditions and come back with recommendations in April regarding an extension of the agreement. Should the cartel agree to extend its output cut, global oil inventories would further tighten and oil prices should move higher (potentially into the $55 to $60 per barrel range).
IEA Report and U.S. Crude Draw Suggests the Recent Bearish Sentiment on Oil is Likely to Reverse....
The International Energy Agency (IEA) today reiterated its belief that OPEC cuts should create a global crude deficit in the first half of 2017. The IEA noted that global inventories rose in January for the first time in six months despite OPEC output cuts (in part because OPEC members pumped heavily before the cuts were implemented and U.S. shale producers have raised output), but said if it stuck to its production curbs the market should see a deficit of 500,000 bbl/d in H1/17. Accordingly, the market has been intently watching the weekly U.S. Energy Information Administration (EIA) figures to see if it confirms a fall in U.S. inventories. After nine consecutive weeks of inventory builds in the U.S., this week surprised the market with a crude draw of 237,000 barrels compared with analysts' expectations for an increase of 3.7 million barrels. Further, gasoline stocks fell by 3.1 million barrels, compared with analysts' expectations for a 2 million-barrel drop. Distillate stockpiles, which include diesel and heating oil, were down 4.2 million barrels, versus expectations for a 1.7 million-barrel drop.
Overall, the message from the IEA (supported by this weeks draw in crude) is that the market needs to have patience as it takes time for production restraints to filter through in the form of inventory reductions. So, as long as OPEC stays on track and non-OPEC delivers on their agreed cuts, the market will continue to balance. The question for market watchers is while such patience (suggested by the IEA) will likely benefit longer-term investors it may not be much help for money managers facing year-to-date losses on long positions (suggesting further oil price volatility in the near term is likely in the cards).
At the CERAWeek energy conference in Houston this week, the International Energy Agency (IEA) noted that oil prices are set to rise sharply starting in 2020 if new energy investments are not made in 2017. Despite global oil supplies appearing adequate for the next three years (due to supply additions from growing U.S. shale and Canadian oil sands projects), in 2020 the oil markets could be in for a significant price shock. Specifically, the IEA noted that oil investments dropped sharply in both 2015 and 2016, and if that trend continues into 2017, there will be a significant problem in three years. Interestingly, the agency noted that oil investment globally was US$450 billion in 2016. The IEA is hoping to see that increase by 20% or a further US$90 billion in 2017. Regarding Canada, oil investment was estimated at $37 billion in 2016, and the Canadian Association of Petroleum Producers (CAPP) expects it to rise to $44 billion in 2017.
In terms of demand, the IEA does not see peak oil coming in either the short or medium term, as global oil demand should remain strong driven by both India and China. Notably, global oil demand grew by 2 million bbl/d in 2015, the largest year-over-year growth in five years and is expected to continue to grow at roughly 1.2 million bbl/d per year to 2022 (propelling total global oil consumption to 104 million bbl/d in 2022 from 97 million bbl/d currently). Overall, without significant investment in oil projects this year, the IEA compared the potential market dynamics in 2020 to those seen in 2008, when oil prices spiked to more than US$140 per barrel. As oil prices remain range bound between $50-$60 per barrel and so much uncertainty around whether any significant oil projects will enter the pipeline in the next few years, the possibility of a price spike in oil in the coming years seems very real.
A Canadian Energy expert