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As widely expected, OPEC and its Allies announced on Thursday that it will extend its historic 1.8 million Bbl/d production cut to further reduce the global oversupply of oil and achieve a sustained price recovery. The cartel together with Russia and other non-members agreed to prolong their accord through March (giving exemption to Libya and Nigeria), but no new non-OPEC countries will be joining the pact and no option was set out to continue curbs further into 2018. Saudi Arabia's Energy Minister Al-Falih noted that the current cuts are working, adding that stockpile reductions will accelerate in Q3/17 and inventory levels will come down to the five-year average (~2.73 billion barrels) in the first quarter of 2018. Notably, Al-Falih also stated that while he expects a “healthy return” for U.S. shale, he believes this will not derail OPEC’s goals and a nine month extension will “do the trick,” Going forward, the Joint Ministerial Monitoring Committee (composed of six OPEC and non-OPEC nations) will continue watching the market and can recommend further action if needed.
Post the announcement, crude oil futures dropped by as much as 5% in New York on Thursday, before settling at $48.90. Despite the markets negative reaction, largely attributable to the lack of a sweetener in the deal or clear exit strategy, global crude oil inventories will grind lower with the new production cut extension (providing overall compliance remains strong). Accordingly, OPEC now has the wind at its back as fuel demand ramps-up ahead of the summer driving season. Further, the world uses roughly 2 million Bbl/d more oil in the second half of the year than the first half of the year, so the impact from the cuts on supply-demand will be pronounced in the second half of 2017. Overall, the combination of seasonal demand growth and the nine month extension should shrink global stockpiles and lead to a higher oil price by year end (likely in the $60 - $65 per barrel range).
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In the IEA's most recent Oil Market Report, the agency stated that the oil market has essentially reached a balance and will continue to accelerate in the near term. Further, the IEA stated that the oil market was close to balance in the first quarter of the year, with average supply building by 100,000 bpd on a global level, and at 300,000 bpd for OECD members. Notably, if OPEC keeps its output at the April level, the authority estimates an inventory draw of 700,000 bpd by the end of the second quarter. Further, this number will grow if the output cut extension is agreed by everyone at the May 25th meeting. However, the agency also warned that even if OPEC extends its cuts, much work remains to be done in the second half of 2017 in order to drain stocks closer to its benchmark five-year average (roughly 2.7 Billion barrels). Also, while compliance with the agreed production cuts by OPEC and the 11 non-OPEC countries has generally been strong (roughly 96%), Libya and Nigeria (currently excluded from the cuts) could weaken the impact of the deal should production from these countries continue to show significant increases.
On the demand side, the IEA is forecasting global demand growth of 1.3 million b/d in 2017, unchanged from its April report. The agency cited a weaker-than-expected demand for oil from investors in the first three months of the year (particularly in the U.S. and India). However, Chinese demand continues to impress (compensating for most of the weakness in other countries) and is expected to be one of the main growth stories in 2017. Overall, the IEA's report concludes that even with solid demand and continued supply restraint from OPEC, absorbing the enormous glut of oil to reach the benchmark five-year average will undoubtedly be slow going. |
Jason SawatzkyA Canadian Energy expert Archives
October 2020
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