2016 was a year of disruption; the UK’s ‘Brexit’ vote and the outcome of the most contentious US election in decades are just two examples. It should perhaps have been obvious that a year that started out by taking David Bowie from the world was not going to pass by without making a mark, but after optimistic reports of price recovery in (as it was then) the ‘New Year’, few expected the price of Brent Crude to plunge as low as it did in February (beneath US$28.00/bbl).
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Thankfully, despite apparently intractable problems with oversupply and economic uncertainty, prices did recover somewhat. They were further boosted in November with a landmark (and largely unanticipated) deal between OPEC members and non-OPEC producers, which saw Saudi Arabia reclaim its role as global swing-producer. After production cuts of roughly 1.2 million bpd were agreed to, prices rose rapidly back above US$50/bbl and have stayed around the US$55/bbl mark ever since. So, what does this mean for the upstream industry in 2017?
Hopes for a further jump in prices are probably unrealistic. According to Forbes, the main problem now facing the industry is massive global storage inventories.1 Oversupply in 2016 (and earlier) saw so much surplus oil produced that millions of barrels-worth of crude are now sitting around waiting to be used. If OPEC’s production cuts are followed to the letter, and maintained beyond the six-month term of the agreement then these inventories could be reduced to a level that would support a further price recovery (perhaps even to the US$70 - 80/bbl range); the problem is that process will likely take another year.2 In short, the OPEC/non-OPEC agreement wasn’t so much an attempt to return to the price levels of a few years ago, but rather an attempt to establish a price floor that would ease the financial strain on producers.
Considering OPEC’s track record when it comes to cheating on production quotas, a healthy dose of scepticism about how effective the cuts will ultimately be is probably wise. That being said, analyst Sam Wahab of Cantor Fitzgerald Europe has an interesting, and rather more positive prediction for this year. It is Wahab’s belief that “the fiscal economics of OPEC in particular will not allow for a prolonged low oil price environment.” He adds that “Saudi Arabia has pledged to make further cuts in addition to the 600 000 bpd confirmed in November’s meeting, and if they are fully implemented it is not inconceivable that the supply/demand dynamic in the oil market could move into a deficit.”
According to Wahab, the OPEC cuts and an uptick in global GDP growth (predicted to be 3.6% in 2017 compared to 3.4% in 2016) and potential further cuts from non-OPEC members could even see prices rise as high as US$70/bbl by early 2018.
One sector that almost certainly won’t be volunteering to cut back production is the US shale industry. Indeed, one of the factors that continues to weigh down on oil prices is concern over resurgent US shale production. However, if Wahab is right, the ‘threat’ posed by shale could actually drive OPEC to make further production cuts in a bid to maintain (and possibly boost) prices. After all, US shale has shown it can’t simply be killed off – perhaps accommodating this sector is OPEC’s only option?
Whilst we’re not out of the woods yet, it’s fairly safe to say that the upstream industry is in a better place than it was this time last year. The Oilfield Technology team wish you all a happy and prosperous 2017.
- ‘Despite OPEC Production Cut, Another Year Of Low Oil Prices Is Likely’ - http://www.forbes.com/sites/arthurberman/2017/01/09/the-opec-oil-production-cut-another-year-of-lower-oil-prices/5/#7eb18a846dec