Now that the first-half of 2017 is behind us and the next phase of Opec and non-Opec production cutbacks are underway, let us look back and see the results of the producers’ decisions and the outlook ahead.
More than once in this column, I have said that we should not expect too much of a price appreciation as a result of cutbacks, and that to stay within the range of $50-$60 a barrel could be the best one could hope for. In fact, even this optimistic expectation was short-lived as prices went well below $50 in a volatile market that was influenced by production increases elsewhere, which dented the producers’ effort to expedite the market balancing act.
The oil market is often influenced by very small signals and the latest price increases is just an example of how just a small stock draw in the US is able to push back prices above the $50 mark. As I write, Brent and WTI are at $52.68 and $49.78 a barrel and the Opec basket at $48.88 a day earlier and probably above $50 by now.
But the more important thing is that Brent average price this year so far is at $51.68, up from $39.89 a barrel for 2016. At the same time, the Opec basket also appreciated to $50.21 from $36.31 a barrel. This is the most important indicator that the producers’ agreements back in November and December to cut back production by about 1.8 million barrels a day (mbd) are working, though not as much as previously anticipated.
The President of the Opec conference, Khalid Al-Falih, Saudi Arabia’s Minister of Energy, Industry and Mineral Resources, said at the Joint Ministerial Monitoring Committee (JMMC) meeting in St. Petersburg that despite continued pressure on the market, global economic recovery, oil demand picking up and the “reverse in the build-up in global inventories” are reasons for optimism.
He said: “Over the first half of the year, our collective efforts have pulled close to 350 million barrels in aggregate from global supply — so you can imagine where the market would be had we not acted.” Many would say that prices would have been in the lower $30 a barrel.
However, it is evident that the producers’ effort is undermined by the sharp increase in US tight oil production, the recent expansion of supplies from Nigeria and Libya, and the less than the agreed level of compliance by some producing countries within the agreement.
Issam Almarzooq, Kuwait’s Minister of Oil and Chairman of the JMMC, said that the implementation of voluntary adjustments in production “played their part in contributing to an absolute reduction in the overhang of OECD commercial stocks of 90 million barrels so far this year.”
However, OECD stocks are still 250 million barrels above the last five-year average. He warned against complacency and demanded better level of compliance in the next nine months. The conformity level of 98 per cent in June according to the JMMC is disputed by the IEA, where it estimates that compliance in that month was only 78 and 82 per cent by Opec and non-Opec members respectively.
Compliance over the first-half of 2017, the IEA estimates is 92 and 61 per cent for the two groups. Not bad for Opec producers by historical experience, but a better level of compliance is certainly needed in the coming months.
The second-half of 2017 — where demand is expected to increase by almost 2-mbd over the first-half — and steady supplies from non-Opec implies that stock draw is further expected. IEA estimates that this would be at the level of 0.7-mbd, which may improve or at least stabilise prices at or near the current level.
Recent forecasts of 2018 point to more of the same situation where uncertainty is the name of the game. Oil demand is estimated to increase by 1.26- and 1.4-mbd by Opec and IEA respectively.
Non-Opec supplies are expected to increase by 1.4-mbd by the two organisations, which would leave no room for Opec to increase production as supplies would outpace demand. Demand for Opec crude in 2018 is expected at 32.2- and 32.9-mbd by Opec and IEA respectively.
These are the first forecasts of 2018 and are likely to be adjusted many times as we go along depending on developments in the second-half of 2017.
For all this, oil producers are prudent in giving signals that the current agreements on production cuts could be extended beyond the end of March 2018. The JMMC declared that it will “continue to monitor and recommend further actions including the holding of an extraordinary conference of the 24 producing countries if needed.”
The market rebalancing is taking longer and patience and perseverance are needed by producers.
The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.