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Given that there is very little optimism that WTI prices will drastically improve in H1/16, its worth looking at the price drivers highlighted in the recent IEA Oil Market Report that may or may not make a difference in H2/16. First, it would appear that the persistent speculation about a deal between OPEC and leading non-OPEC producers to cut output appears to be just that: speculation. Based on recent comments by Saudi's Oil Minister Ali Ibrahim Al-Naimi at a conference in Houston, it appears the Saudi's have no intentions of cutting production anytime soon. Secondly, many industry watchers believe that OPEC production, aside from Iran, will not grow significantly in 2016. However, Iraqi output in January reached a new record and it is possible that more increases could follow. Another driver of bullishness for many industry watchers is that oil demand growth will receive a boost from the collapse in oil prices to below $30/bbl. Even with the recent price collapse in oil, the IEA is still forecasting that global oil demand growth will ease back considerably in 2016 to 1.2 mb/d (on slowing China growth, etc.). Finally, the expected fall in non-OPEC output is another driver of possibly higher prices in H2/16. The IEA has forecaster that total non-OPEC output will fall by a net 600 kb/d in 2016 (this reduction will help shore up the global supply/demand imbalance, but is not enough to completely balance the market). Accordingly, the IEA notes that supply and demand data for the second half of the year suggests more stock building, this time by 0.3 mb/d. So, with the market already awash in oil, it would seem based on the IEA's forecasts, it is unlikely that oil prices can rise significantly in the short term.
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While Saudi Arabia and Russia's recent agreement to freeze oil output at near-record levels is a step in the right direction (signaling the first cooperation between OPEC and non-OPEC producers in 15 years), it will have no immediate impact on the global supply glut (still hovering at ~1.5 million barrels per day). The deal to fix production at January levels, which also includes OPEC producers Qatar and Venezuela, is really just the first step in a serious of steps that will be required to stabilize and improve the global oil market. So, as opposed to taking more drastic steps such as reducing supply (which would have an immediate impact on price), OPEC members are taking a more gradual approach by looking to eventually meet demand. Another variable to consider is that Iran and Iraq are not a part of the agreement, which will significantly lessen the effectiveness of a coordinated freeze on production. Further, there is always the question of compliance as OPEC members in the past have been guilty of producing more than their stated quota. Overall, this production freeze will not immediately bolster oil prices, but it does create a better foundation for a potential price recovery in H2/16.
With the recent rumor that Chesapeake Energy hired debt restructuring specialists Kirkland & Ellis, more and more investors are increasingly worried that bankruptcies for large and small oil and gas companies will accelerate in 2016. Notably, borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20%, exceeding the past peak of about 17% in 2008. Further, Moody's expects the U.S. default rate to reach the highest in 6 years in 2016 as a growing pool of investment-grade energy debt will most likely be downgraded to junk. According to Merrill Lynch, junk bonds globally have lost more than $360 billion of market value in less than a year, which has reduced investors' willingness to lend to other companies (even outside the energy sector). Notably, debt levels for Canadian Energy companies (E&P and oilfield services) still remain in relatively good shape on average, however if oil prices remain low through 2017, balance sheets will become a serious concern for both Canadian energy companies and investors alike.
Venezuela’s oil minister Eulogio Del Pino today stated that six oil-producing countries have agreed on an emergency meeting between OPEC and non-OPEC member states. The minister further noted that both Iran and Russia have both agreed to take part in the meeting. Given that both Venezuela and Russia are among the hardest hit nations from the global oil price collapse, these are the countries that are likely pushing for an emergency meeting to stabilize global oil markets. Interestingly, minister Del Pino was in Tehran Wednesday on a tour of OPEC and non-OPEC countries and also stopped in Russia earlier in the week to hold talks with energy officials (including discussions with the CEO of Russia's largest oil producer Rosneft). After Russia and Iran, the Venezuelan minister is planning to visit Qatar, Iran and Saudi Arabia, the world’s largest oil exporter. Given Saudi Arabia's firm position to not cut production and maintain global oil market share, it will be interesting to see if both Venezuela and Russia can rally both OPEC and non-OPEC members to hopefully find a solution to end the global oil crises (with or without Saudi Arabia).
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Jason SawatzkyA Canadian Energy expert Archives
October 2020
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