It’s wait and watch all over again in the oil markets
IF THE SAUDIS and Russians thought they could surprise the oil market into a price rise by extending the Opec/non-Opec production-cut agreement by nine months instead of the originally planned six, they have been sorely disappointed.
Oil prices tumbled soon after the announcement. Brent came off by nearly 5 per cent and has stayed in a narrow range of US$50-$52 a barrel since.
The reasons for this are mainly that an extension of the deal had already been priced in, and the market wanted deeper cuts for longer and preferably more non-Opec countries joining in.
Various ministers and delegates had hinted that an extension could include deeper output reductions or as long as a 12-month agreement, but it would have been impossible to get everyone to agree to that. So it is not surprising that the producer group stuck to extending the plan to cut output by 1.8 million barrels a day by nine months to the first quarter of 2018.
It has become a wait-and-watch game now with all eyes on inventory data and the level of compliance by producers in the coming months.
Compliance to the output cuts has so far been remarkable. According to an S&P Global Platts survey, of the 11 members of the Organisation of the Petroleum Exporting Countries (Opec) that have a quota under the deal, compliance is 117 per cent, based on January-through-April averages.
But the first half of the year is seasonally a period of low demand, and a significant portion of the cuts that Opec delivered came through field maintenance works timed for this half.
With many of those works wrapping up, Opec members will have to get serious about shutting in production. Opec and non-Opec producers will have to prove to the market that they remain committed to the cuts, particularly in the summer peak demand season in the Middle East.
While the market may have sought a longer extension, Saudi Energy Minister Khalid al-Falih appears confident that the extension into the first quarter of 2018 will help restore stock levels to the five-year average.
The latest US stocks data from the Energy Information Administration may have further bolstered his confidence.
EIA data released on June 1 showed that US stocks fell for the eighth straight week. At 509.90 million barrels, crude stocks still sit 102.7 million barrels above the five-year average for this time of the year. But at the end of 2016, that surplus equalled 125.8 million barrels, which shows that some progress has been made toward Opec’s goal of drawing inventories down to five-year averages.
It is, however, important to point out that the drop in crude-oil stocks is due to high refinery utilisation and not falling imports.
Another factor helping lower crude-oil stocks in the United States has been rising exports. Exports averaged 786,000 barrels per day year to date, compared with 494,000bpd over the last three months of 2016, according to the EIA.
Scepticism over the resilience of US shale oil, with some projections forecasting growth of 1mmbd this year or more, appeared to convince several Opec ministers that deeper cuts were unnecessary.
Falih has said that such projections were “ambitious and bullish assumptions”.
He is not worried that US shale growth will undo the impact of the Opec/non-Opec cuts, saying the barrels would be needed to offset legacy field declines.
Global exploration and production investment worth $1 trillion has been cancelled or deferred since the downturn began in late 2014, according to some industry estimates, and US output will not be able to displace all the drop in output resulting from low investment.
This was echoed by United Arab Emirates Energy Minister Suhail al-Mazrouei, who has also said he did not believe that US shale producers would be able to increase production by 1mmbd next year. US production has risen 572,000bpd to 9.342mmbd so far this year – the highest level since August 2015.
Meanwhile, almost nobody expects Asian buyers to feel the impact of the output-cut agreement. Middle East producers and the Russians are likely to ensure that they keep their key markets well supplied as they strive to maintain market share and limit the prospect of the region being flooded with arbitrage cargoes.
In fact some said that these producers would go out of their way to meet peak Asian demand.
This could mean one of the following: They cut supplies to Europe and the US; they supply from their stocks; or they disregard the output cut deal.
Let’s hope for the sake of Opec’s and non-Opec’s credibility it is not the last.
MRIGANKA JAIPURIYAR is associate editorial director, Asia and Middle East energy news and analysis, at S&P Global Platts.
