- Will the recent price stabilization continue?
- OPEC November meeting to decide short-term course for the market
The crude oil prices which were on a roller coaster ride during the past few years, appear to have stabilized in the last few quarters. ICE Brent, the major international benchmark for crude prices declined from its intermittent peak of ~$100 per barrel (mid-2014) to a low of around ~$35 (the first quarter of 2016). The prices slipped as global markets reeled under oversupply, while demand growth was stable and led to a surplus situation for the black liquid. The OPEC members control ~40% of the global oil supply and during the course of their extensive discussion both within and outside the group (non-OPEC nations) an agreement was reached on the 30th of November 2016 to cut the oil output. It was decided to cut down the oil production by 1.2 MBPD to 32.5 MBPD (excluding production of other liquids), this was to be effective from the 1st of January 2017, while few non-OPEC members including Russia too agreed to cut the output by 0.6 MBPD.
The overall cut in the output may not seem to be huge, but was still a respectable cut as this was nearly 2% of the global oil supply, which stood at ~97 MBPD (2016). If this was to be implemented positively than there was an anticipation that the move will outdo with the global oil market surplus, while also aiding significantly to support the prices and the market sentiment. In totality, as the move is nearing a year, it can be stated that there was some sort of stabilization in the oil markets, especially since the second half of 2017. One of the major rationales for a rebalance in the past few months is a high level of compliance from the OPEC and non-OPEC members. Secondly, the revised estimates from the IEA and OPEC for crude demand growth upwards of 1.6 MBPD (2017) and 1.4 MBPD (2018), this is mainly due to the global economic expansion.
The oil prices stabilized after the announcement of the OPEC deal to curb the output, this can be seen from the above chart. The ICE Brent and NYMEX WTI averaged around ~$54 and ~$51 per barrel since the OPEC’s announcement, this was for the subsequent period from November 2016 to May 2017. Moreover, prices dipped sharply (Q2 2017) despite the OPEC and non-OPEC members agreeing (May 25, 2017) to extend the production cut up to March 2018. On a positive note, the increase in compliance level from the OPEC and non-OPEC members supported the oil markets in the past few months.
Further, on the global production side, the curb in production from OPEC slowed down the YOY growth for crude production for the member nations. The YOY growth in the output from OPEC was -0.2% (first 9 months of 2017) as compared to 3.1% (first 9 months of 2016). The crude oil which was in surplus in 2015 and in the first half of 2016 showed positivity as demand-supply gap reduced after the latter period.
The price rise for crude oil after the OPEC announcement last year prompted the US shale producers to increase their production, this was on expected lines. The shale producers increased their output production on a YOY basis by 3% (first 9 months of 2017) and averaged 9.1 MBPD. Though this was not a momentous increase as the US producers witnessed a significant cut in the output (2016) and despite a modest increase in 2017, these producers were still at the lower base than their peak production. Hence, the internal growth for Q3 17 for the US output was moderate as summer driving season ended in the month of September, while hurricane too weighed on the output in the southern region.
The cut in the production from the OPEC members was compensated by a stable to a modest increase in production from the US. Largely, the commodity moved to a balance situation, while intermittently it also saw few periods of deficit. According to the EIA estimates, the overall crude oil supply will be ~98 MBPD (2017), this is moderately higher than the previous year’s reading of ~97.2 MBPD as the demand is rising at a marginal pace and is aiding healthy cut in the surplus situation. The crude oil, which was in surplus of ~0.3 MBPD (2016) is expected to be in deficit of 0.2 MBPD (2017).
Thus, as stated above, the increased compliance from the OPEC and non-OPEC member nations supported a rise in the price level. The compliance level against the agreed cut in output from the OPEC and non-OPEC members increased from 82% and 72% (July 17) to 104% and 105% (October 17). Saudi Arabia, which is the largest producer implemented the curb effectively and achieved the average compliance level of 122% (last 8 months). A higher compliance level indicates the seriousness within the member nations to control production and bring the commodity back to a stable and desirable price range.
Furthermore, as per the current scenario, the OPEC is scheduled to meet again on the 30th of November 2017, where a decision on the current production cuts will be taken, which is going to expire by the end of March 2018. There were optimistic comments from different OPEC members, wherein they plan to extend their support for the maintenance of cuts in 2018. Additionally, deliberations on further extension possibly beyond 2018 will also be held, while Saudi Arabia’s energy minister recently commented ‘OPEC and its allies should announce an extension of their output curbs when they gather at the end of this month’.
Hence, lately, the crude oil prices have found some sort of stability in the past few months. Televisory expects the member nations to continue with the existing cuts, this will provide support for an increase in oil prices. The markets have already factored the cut and this is visible from the prices. The oil markets may witness some form of volatility in the near term, although a moderate positive bias might continue in the short to medium term.