FRIDAY, March 29, 2024
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Keeping to quotas the key for rebalancing of oil market

Keeping to quotas the key  for rebalancing of oil market

NOVEMBER lived up to the 2016 theme of cliff-hangers, opening with Donald Trump’s surprise victory in the US elections and concluding with the plan by the Organisation of the Petroleum Exporting Countries (Opec) to hold production at 32.5 million barrels a day (mmbd) starting on January 1.

The 1.2mmbd reduction – the group’s first coordinated cut since 2008 – exempts Libya and Nigeria, and is contingent on key non-Opec producers also agreeing to cut 600,000 barrels a day (bpd).
While the market had more or less expected a successful Opec deal, with oil prices rising since the Algiers Accord in September, doubts lingered as to whether internal sparring could be reined in to allow an agreement.
As details emerged on the deal, oil prices surged 10 per cent intra-day with front-month January NYMEX light sweet crude eventually settling up 9.3 per cent day on day at US$49.44 a barrel on November 30, and January Brent up 8.8 per cent at $50.47 a barrel.
High prices may provide temporary respite, but the rally was balanced precariously on what the December 9 yesterday’s Opec meeting with Russia might bring.
Russia has agreed to cut its crude-oil production from the current level of around 11.2mmbd from January 1, and expected to prepare a schedule of the output curb by yesterday, Russian Energy Minister Alexander Novak said after the announcement of the Opec deal.
While oil producers may be rejoicing at the success of reaching a deal that was months in the making, stakeholders will now have to keep a close eye on monthly production data to make sure the commitment to quotas are kept.
For oil prices to sustain at current levels, a cut of nearly 1.8mmbd in global output would be needed. But if that’s missed, the market will not hesitate to correct downwards. US shale rig counts could improve, taking advantage of the price rise. But shale-oil production has an upper limit in short term, unless investment that trickled to a halt in the low-oil-price environment reappears in 2017.
With production and prices now engaged in a tricky balancing act, more countries, including the United States and Saudi Arabia, will angle for market share in Asia, where many companies negotiate crude-oil supply in term contracts with national producers months in advance.
With several term negotiations for 2017 already concluded, the strategy for producers would be to retain market share at any cost, or ensure profit margins to stem losses from declining oil revenues. In turn, expensive Middle East oil could incentivise Asian refiners to look for sweeter crudes from northwestern Europe.
The M1 Brent-Dubai exchange of futures for swaps, or EFS, a key spread watched by the market to evaluate the value of sweet crudes against sour crudes, was at its narrowest in 13 months at $1.79 a barrel on November 28, according to S&P Global Platts data. This may result in some spot buying of Brent-linked crude by Asian refiners who have the bandwidth to adjust their crude-oil slates to take advantage of the trend.
On their end, Asian economies are preparing for an influx of crude-oil cargoes, by building more storage and refining capacity in the region.
Indonesia, having resigned from Opec at its latest meeting, stressed the need for independent energy security. “The most important aspect of energy security is not being an Opec member, but building strategic petroleum reserves,” a government official said recently.
The populous archipelago is expected to produce only 780,000bpd of crude in 2017, but has embarked on a massive refinery expansion drive with capacity expected to rise from 1.02mmbd currently to at least 1.75mmbd in 10 years. At present, its existing 800,000bpd of domestic refined production meets only about 50 per cent of the country’s needs.
Similarly, India, which imports 80 per cent of its crude oil needs, has invited global oil companies to bid for space at its newly built underground storage at Padur on the west coast. India has two other strategic crude oil storage facilities – at Visakhapatnam and Mangalore. Together, the three facilities would be able to store up to 39 million barrels of oil. The storage at Padur, in the southern state of Karnataka, is expected to be ready for filling in the first quarter of 2017.
Overall global growth of oil demand continues to slow down, however, dropping from 550,000bpd in 2015 to a projected 180,000bpd in 2016 because of “vanishing” growth in the Organisation for Economic Cooperation and Development states and a “marked deceleration” in China, according to the International Energy Agency.
Therefore, supply remains the key factor in market rebalancing for 2017.
The fact that Opec did not use Indonesia’s resignation or Libyan and Nigerian exemptions to excuse itself from its committed target in September indicates just how grim things are at the producer group.
In the same vein, Saudi Arabia’s change in tack signals a new brand of leadership in the monarchy. For the Opec kingpin, the past few years had involved a fight for market share while watching its fiercest rival, Iran, make a comeback. And thinning coffers from declining oil profits have also meant austerity measures for a kingdom readily placated by the comforts of oil wealth in the past.
But if any producing nation does cheat on the reduction quota, it won’t be easy to detect it, at least not until the second quarter of 2017. And by then, most would have enjoyed the fruits of elevated prices, which may lead to more stringent compliance with the quotas.
 

The writer is senior specialist, oil price assessments, S&P Global Platts.
 

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