Dubai: Amid the disagreement to freeze production at January levels in Doha, and talks of yet another meeting in Russia in May, all undertaken to cut supplies in the market, something very fundamental is changing in the oil market, i.e. the supply equation. The supply glut, that had been the root cause of a 70 per cent drop in prices in the last two years, has been taking a turn and slowly due to production outages and disruptions.
“The recent rally in oil prices has been led in part on the expectation of this rebalancing, as well as the fact that speculators have closed out historically large short positions,” Vaqar Zuberi, Portfolio Manager & Senior Analyst within Mirabaud Asset Management’s Hedge Fund team told Gulf News. Oil prices have already gained
Production issues
Mirabaud expects 2016 production to decrease by 1.3 million barrels per day, assuming that Opec production remains at the current level, plus there is a possibility that production targets could revised lower due to production issues in Nigeria, Iraq and Venezuela.
Nigeria’s production is at its lowest level since 2009, due to attacks on pipeline, and Iraq’s output has been curbed to 4,2 millions of barrels per day due to export pipeline disruptions. “We believe that rebalancing will occur in the second half of 2016, and that oil prices will adjust higher accordingly,” Zuberi added. He expects Brent prices to recover to over $50 per barrel, from the current $45 (Dh165), a level that US shale is still uncomfortable with to come online.
Shale
“I don’t think shale production will recover any time soon. It requires high prices for a prolonged period, to convince companies to start investing again and banks to lend again,” said Francisco Quintana, Head of research, Asiya Investments.
Even the US rig count has reduced sharply to 400 rigs from 1,600 rigs, denting shale oil production. Shale output has declined approximately 500,000 barrels per day and is projected to decline by the same level in the second half of this year, helping to close the supply demand imbalance that has contributed to price weakness.
Projects cancelled
Approximately $400 billion worth of exploration and production projects have been cancelled over the past 18 months. This equals about 75 per cent of upstream capital expenditure projects. Outside of the US, production forecasts have been reduced in China and Mexico.
However, the biggest threat is to the small cut in supplies if Saudi Arabia, the world’s largest exporter of oil, plans to maximise output.
The world’s largest oil exporter could increase output by more than 1 mbd, or about 10 per cent, to 11.5 million if there was demand for it, Saudi Arabia’s Deputy Crown Prince Mohammad Bin Salman Bin Abdul Aziz said on April 14. It could increase further to 12.5 million in six to nine months, he added.
The country pumped 10.2 million a day last month.
