Saudi Arabia’s oil minister said that the supply cuts agreed by Opec and non-Opec countries at the end of last year may not need to be extended beyond June, as rising demand and strong compliance should have pushed the market towards balance by then.
Khalid al Falih, speaking at an industry event in Abu Dhabi, struck a bullish pose saying the cuts, which began on January 1, would have their “full impact by the first half” of 2017.
“We don’t think it’s necessary given the level of compliance…and given the expectations of demand,” Reuters reported.
“Based on my judgement today it’s unlikely that we will need to continue (the agreement) – demand will pick up in the summer and we want to make sure that the market is supplied well. We don’t want to create a shortage or squeeze.”
He added, however, that the group could still extend the six-month deal “if there was a need”.
Brent crude, the international oil benchmark, was up 38 cents at $55.83 a barrel by 10am London time while US benchmark West Texas Intermediate gained 32 cents to $52.69 a barrel.
US oil production has turned a corner after a long period of weak petroleum prices, the government said, with volumes rising for the first time since early 2015.
The Energy Information Administration forecast that oil output from the US will increase 1.3 per cent to 9m barrels per day in 2017, abandoning an earlier prediction of a 0.9 per cent fall.
In the first forecast for 2018 in its monthly Short-Term Energy Outlook, the statistical agency said US crude production will rise another 3.3 per cent, or 300,000 b/d, to 9.3m b/d. Production hit bottom last September, EIA said.
“The general decline in US crude oil production that began almost two years ago is likely over, as higher average oil prices and improvements in drilling efficiency are giving a boost to output,” said Adam Sieminski, the EIA’s administrator.
While the market has taken the latest round of “optimistic” jawboning by OPEC members in stride, sending crude higher by 4% ahead of next week’s OPEC meeting in Vienna where the terms of the OPEC production cut are expected to be finalized, the reality is that a favorable outcome may be problematic.
As Bloomberg’s Julian Lee explained overnight, “OPEC says it’s close to a deal to cut oil output for the first time since 2008, a move that may halt a 2 1/2-year price slump. The actions of individual member states tell a different story. The simple math supporting cuts looked solid at OPEC’s meetings in June and December. Prices then were way below most members’ fiscal break-even points. An output cut now of 1.5 million barrels a day, or 5 percent, would need to boost the oil price by only $2.50 a barrel for OPEC nations collectively to be better off. A $5 price increase would boost the value of what they pump by about $100 million a day.”
There are various nuances as to why a deal, one in which Saudi Arabia would bear the brunt of total production cuts, but as Lee notes, while OPEC Secretary-General Mohammed Barkindo has been touring member nations to shore up support for an agreement before the Nov. 30 meeting, culminating with a trip to Doha for talks last week, “the meeting didn’t resolve much. It certainly didn’t tackle any of the thorniest questions that OPEC must still overcome if coordinated measures are to happen.”
“The road from the OPEC agreement in Algiers to the next official OPEC meeting in Vienna is long and bumpy,” said Harry Tchilinguirian, head of commodities strategy at BNP Paribas SA in London.
The report stressed that oil prices were volatile and highly dependent on a variety of factors, including Brexit contributing to the general uncertainty and risk aversion or economic slowdown in Russia and China.
“Oil prices are assumed to average $43 a barrel in 2016 and $51 a barrel in 2017. Over the medium term, any further oil price recovery is expected to be limited, with futures markets suggesting prices will remain below $60 by 2021,” the report detailing the oil market forecast and its influence on the Middle East, North Africa, Afghanistan, and Pakistan said. In a recent effort to revitalize oil demand, Organization of the Petroleum Exporting Countries (OPEC) members reached an agreement on oil production freeze scheduled for finalization at OPEC summit on November 30, with non-OPEC states, including Russia, open to also capping the output.
A deal is better than no deal, but just how good is Opec’s first agreement to limit production since the financial crisis?
To recap: In Algiers on Wednesday, the world’s major producer nations agreed on their first co-ordinated effort to control supply since 2008 and sent oil prices duly soaring by 6 per cent.
Details, including country-specific targets, will be released on November 30 but analysts and Opec-watchers have already raised concerns about how the burden to cut production will be spread and the prospect of backsliding among Opec’s members.
Here’s a round-up of what they make of it all.
The Algiers meeting is something of a “false dawn” says Hamza Khan, head of commodities strategy at ING who says the cut is still a shadow of the 1.5m b/d cut agreed in 2008. It will also pose problems for some Opec’s dissenters – including Iran, Nigeria and Libya, he added:
Saudi Arabia could have shouldered the bulk of cuts, likely reducing output of heavier blends from the Wafra oil field.
But the kingdom’s new crown prince and oil minister have been vocal about the prospects of a Saudi Aramco IPO in 2017/18, and such discretionary cuts would hurt investor confidence in such a listing.
Russia at the moment does not appear to be part of the agreement and continues to pump at record levels.
Analysts at Morgan Stanley have also doused a good deal of cold water on the deal, claiming the intervention is “not as good as it sounds” with execution still posing a major problem.
Iran is taking a hard line as talks between big oil producers are set to get under way in Algiers.
Rather than targeting an outright level of production, Iran wants to regain lost market share before it joins any agreement to limit supplies, according to Iranian oil sources.
Tehran wants around 13 per cent share of any new Opec output ceiling. Based on the cartel’s current production that would translate to around 4.2m barrels a day – around 400,000 b/d more than Iran currently claims to be pumping.
Such a demand will be difficult for Saudi Arabia to accept. The Opec kingpin wants Iran to cap its oil output at 3.6m barrels a day, the level analysts say it produced in August, in exchange for other big producers cutting their production.
Opec members and other big oil producers are meeting on the sidelines of the International Energy Forum in Algeria. An informal meeting of Opec ministers is scheduled to take place on Wednesday.
Hopes of a deal are fading, although there could still be a surprise.
The poor old International Energy Forum has been overshadowed by the sideline OPEC meeting. The actual forum starts today but all traders are really interested in is the OPEC and non-OPEC chatter about production deals that may arise out of secondary meetings between producers on Wednesday.
Algeria has tried to keep things on track by saying that anything can and may happen at the gathering. Given all the deal, no deal headlines we heard last week, that might be wishful thinking, as it usually is from the smaller producers.
Is there going to be a production deal soon?
Yes. There will be a deal coming soon. Will an outright deal come this week in Algiers? That’s doubtful but we could well get the makings of a deal this week. We already know that the big boys are open to a deal but not until they’re pumping at full pelt, which will sort of defeat the object really. You don’t balance the market by pumping far more than demand and then lock the taps in open mode. Iran is getting closer to the 4mbpd production levels they want and the Saudi/Russia Doha freeze had more holes than Swiss cheese but shows some willingness to do something. A deal may still be some way off but it’s getting closer, maybe weeks at most.
Any deal that comes is going to be virtually ineffective until demand catches up to bite into supply, and that could be years away. In the meantime these clowns can’t keep their word or a deal in place for 5 minutes.
At the end of the day, any news that signals a deal is going to be signed, sealed an delivered will boost the price of oil. After that, the supply/demand dynamics will still be there for all to see, and will be the true driver of prices long-term. If you’re trading the black stuff, keep that in mind and be prepared for some choppy and volatile conditions in oil markets for the next three days at least.
Saudi Arabia’s oil policy, unveiled just under two years ago, at the November 2014 OPEC meeting where it effectively splintered the OPEC cartel by announcing it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business has backfired spectacularly: not only has OPEC failed to crush the US shale industry, which as a result of increasing efficiencies, and debt-for-equity exchanges has seen its all in production costs tumble, making even far cheaper oil prices profitable (especially with the addition of hedges), not to mention Wall Street’s ravenous desire to buy any debt paper that offers even a modest yield allowing US oil producers to delay or outright avoid bankruptcy.
But while shale has avoided annihilation, it is Saudi Arabia that has been suffering. In “Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class“, the WSJ reports that “a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems.”
The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding. Those spending cuts are now hitting the Saudi working middle class.
Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out.
“Most people are ordering less food or they change their orders to more affordable options,” she said.
Energy Minister Alexander Novak is expected to lead the Russian delegation at the September 26-28 International Energy Forum (IEF) in Algiers, Algeria, where OPEC and non-OPEC countries will renew talks on a possible oil output freeze.
“There is the possibility that there’ll be an increase in oil production as a result of shale oil and then the prices will fall again,” Siluanov said in an interview with CNBC, a US cable business news broadcaster. The minister called Russia’s budgeted $40 per barrel oil price estimate for 2017-19 “conservative.” “In our view, this is a balanced price at the moment. It’s a price at which the oil producers, especially shale oil producers, are at their capacity levels at the moment,” he said.