Staring down the wellhead: post-OPEC outlook
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It’s been a little more than two weeks since the Organization of the Petroleum Exporting Countries (OPEC) reached its momentous decision to cut production in an effort to stabilize world markets and improve oil prices. OPEC reached this consensus after a long deliberation process and with the understanding that Russia and 10 other non-OPEC countries cut down on production levels as well.
Since the announcement, prices have fluctuated. This week, prices declined amid oversupply concerns and the Federal Reserve’s increase of US interest rates. Current numbers are lower than they were immediately after OPEC’s announcement. In the midst of all this uncertainty, it’s not too early to start projecting about Q1 crude prices and market conditions, as industry experts have already started forecasting the state of the industry three months hence.
Russia leads the charge…
Russia has been an interesting nation to observe, post-OPEC decision, as many felt the oil-producing giant would not pledge a production cut with OPEC. However, Russian Energy Minister Alexander Novak declared that Russia would start cutting down on its oil output in early January. The cumulative cut agreed on by non-OPEC members comes to 558,000 bpd, with Russia assuming responsibility for the lion’s share with 300,000 bpd. The plan is for the nation to gradually decrease its output levels to reach the agreed number by around April/May 2017.
Russian President Vladimir Putin had pushed for the cut, urging local crude producers to align with the nation’s commitment, and he was instrumental in driving forward negotiations with other nations, Mr. Novak said.
Another nation from the former soviet bloc, Kazakhstan, has also pledged a 20,000 bpd cut after diplomatic pressures were exerted on the country. However, the International Energy Agency (IEA) has kept its output projections for Kazakhstan the same, since the government has sworn that the output from its three largest oil fields will not decline. In fact, Kazakhstan’s total output is estimated to grow by around 160,000 bpd in 2017.
So what’s in store for the energy industry in the first six months of 2017?
The IEA forecasts a sharp oil supply deficit during H1, by close to 600,000 bpd, as OPEC and the 11 non-OPEC nations follow through on their commitment. Stockpiles are due to decline only when OPEC as a whole cuts down on its numbers to maintain a level of 32MM bpd. This might prove to be slightly tricky, as in November alone, the organization’s member states collectively produced close to 34MM bpd, which is one of the highest rates it has ever churned out. This means it must cut down even more on production in order to adhere to the promised decrease levels.
The IEA has observed that the next few weeks will prove critical for the industry, as OPEC’s strength and commitment to the cuts will be measured as January approaches. If it does not follow up on its word, the market runs the risk of an even larger supply glut and price crashes to the low levels of the past year.
Still, the market is choosing to give OPEC the benefit of the doubt – at least for now – and is already projecting what the cuts will mean for the US energy industry.
For one thing, if prices remain at current levels and ascend higher, US shale oil producers can be put back into business and contribute enough pressure on the supply side. As we all remember, US shale positively boomed back in 2014, when crude prices enjoyed levels around and above $100.
However, as OPEC is assuming the responsibility for these market movements, the IEA warns against throwing caution to the wind and investing in new ventures to milk high prices. These high prices do not come with a guaranteed floor, and US energy operators would be remiss in assuming pricing stability through 2017, declared the agency.
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