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Editorial comment

Another month has passed and things are still looking relatively positive for the global upstream industry – Brent crude is sitting just above US$55/bbl as I write this, more than US$20 higher than this time last year. Production cuts made by OPEC at the start of this year still appear to be counteracting downward pressure from the resurgence in drilling activity seen across North America.


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The increased and somewhat stable oil price has encouraged a battered US shale industry to get back down to business. The Baker Hughes Rig Count for the US and Canada shows a total active rig count of 1095, which represents a combined increase of 418 rigs from this time last year. Whilst it’s encouraging to see the industry back at work, the rapid rise in rig count raises the prospect of a return to significant oversupply and an oil price back down in the US$40s (if not lower), which is something that nobody in the industry wants to see. It’s also worth bearing in mind that back in January, Saudi Arabia’s Energy Minister, Khalid Al-Falih, said that he saw no reason for the cuts to last beyond six months. He stated: “We don’t think it’s necessary, given the level of compliance we have seen and given the expectations of demand […] The re-balancing which started slowly in 2016 will have its full impact by the first half.”1

However, that’s not to say this recovery is over before it has truly begun; Al-Falih also added that: “of course, there are many variables that can come into play between now and June, and at that time we will be able to reassess.”2 And, as I’ve noted before, there is an argument that OPEC producers will be forced to maintain (and possibly deepen) the cuts in order to further support the oil price in the face of increased US production – after all, for many OPEC producers, oil exports are their primary source of income.

It’s possible that this logic is becoming apparent to some OPEC members; unlike previous cuts agreed upon by the group, which have suffered from high levels of cheating, a survey conducted by Reuters has found compliance in February to be as high as 94% – with group output dropping by 1.098 million bpd out of the 1.164 million bpd that had been pledged.3 However, things aren’t quite as rosy when looked at in a little more detail – whilst OPEC’s overall production is down, this is largely due to the efforts of one country: Saudi Arabia – the Kingdom is cutting further than its own agreed quotas in order to compensate for other members, such as Algeria, Iraq, Venezeula, and even the UAE.

The reasons behind Saudi’s willingness to go the extra mile for its fellow OPEC members aren’t exactly altruistic. In addition to the financial difficulties seen by many OPEC members, Saudi Arabia also has the sale of a 5% stake in Saudi Aramco to consider – the Aramco IPO could, with the right oil prices, bring in US$100 billion into the Saudi treasury. This money is earmarked for use in the country’s extensive ‘Vision 2030’ diversification scheme as the Kingdom moves to wean itself from heavy dependence on oil revenues.

The OPEC agreement on 30 November last year served as a much-needed piece of good news for an industry suffering under one of its worst downturns in decades. So far, it seems that almost everyone – both within OPEC and without – has benefited from a higher, relatively stable price. Here’s hoping that trend continues.

References

  1. ‘Saudis See No Need to Extend OPEC Deal Beyond Six Months’ – https://www.bloomberg.com/news/articles/2017-01-16/saudis-see-no-need-so-far-to-extend-oil-cuts-given-compliance
  2. Ibid.
  3. ‘OPEC compliance with oil curbs rises to 94 percent in February, survey says’ – http://www.cnbc.com/2017/02/28/opec-compliance-with-oil-curbs-rises-to-94-percent-in-february-survey-says.html

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