Oil prices seen stabilizing after latest Opec deal

Oil prices seen stabilizing after latest Opec deal

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By Syed Rashid Husain

AS expected, OPEC has extended its output cut for another nine months – until March 2018. Though prices stabilized later, yet, the initial market reaction to the announcement was negative, resulting in almost 5 percent dip in crude prices on Thursday. Many felt this was already priced into the global crude market prices.

In fact, crude prices sank by two dollars once Riyadh ruled out deeper production cuts, even before the onset of the OPEC meeting. «Comments from the Saudi oil minister that a nine-month extension is the ‹safe bet›, and that deeper cuts were not necessary, caused a near panic reaction Thursday morning with Brent oil dropping almost $2 in the minutes that followed,» David Cheetham at brokerage XTB was quoted as saying.

The price rise this year has spurred growth in the US shale industry, which is not participating in the output deal. With global crude stocks still near record highs, the much-needed market rebalancing was taking its time, many in the industry felt.

Some others had hopes that OPEC may opt to take a more aggressive stance by deepening the production cuts. The current trend in the oil market may not change much, at least in the short term, following the OPEC decision. Energy consultancy Wood Mackenzie is of the view that keeping existing oil output at current levels for another nine months would result in a 950,000 barrels per day production increase in the United States, thus undermining OPEC›s efforts to balance supply and demand.

Michael Cohen, head of energy markets research at Barclays, insisted that market may have been looking for «the icing on the cake,» such as deeper output cuts or limits on exports. «When those things weren›t included, then this kind of movement happens,» he told CNBC in an email.

“A nine-month extension is insufficient at shale’s current trajectory. The strategic challenge of shale is still to be addressed,” said Jamie Webster, director for oil at Boston Consulting Group.

Nizam Hamid, ETF Strategist in Europe at wealth manager WisdomTree, felt that “with supply side dynamics undergoing a fundamental shift thanks to the impact of US shale, only decisive action from OPEC will boost prices from current levels, and so far investors have not been satisfied that OPEC is tackling the issue aggressively enough.”

Other factors also got into play. In its first complete budget proposals, the White House announced its intention to sell half of the nation’s emergency oil stockpile. The planned move could raise $500 million in the fiscal year 2018 by draining the Strategic Petroleum Reserve, and as much $16.6 billion in oil sales over the next decade.

The proposal also seeks to boost government revenues by allowing drilling in the Arctic National Wildlife Refuge, ending the practice of sharing oil royalties with states along the Gulf of Mexico and selling off government-owned electricity transmission lines in the West. Like much of the budget, those moves are likely to face opposition on Capitol Hill.

Although the presidential budget proposals typically undergo significant changes in Congress, they do provide insight into White House priorities.

All these carry implications. The US Strategic Petroleum Reserve currently holds 687.7 million barrels of oil in salt caverns and tanks at designated locations in Texas and Louisiana. On the other hand, the 19-million-acre Arctic National Wildlife Refuge has been closed to oil exploration since 1980 due to concerns about the impact on the region›s caribou, polar bears, and other animals.

But Trump had promised to flex America›s energy muscles, wanting to change the current set-up. The budgetary proposal released last week thus calls for raising nearly $2 billion in revenue over the next decade by selling oil and gas leases in an oil-rich section of ANWR.

All these also helped dip oil market prices.

But longer term, there are silver linings on the horizon. The dip following the OPEC meeting could be a phase in passing, one could say now with some certainty. And many agree to it.

“We believe there are limits to US production at current prices, particularly with some evidence from producers of rising marginal investment costs for new wells,” said Rob Haworth, senior investment strategist at US Bank Wealth Management in Seattle. But “low-interest rates and solid demand for high-yield debt are going to help producers continue to invest and grow production for now.”

Given all that, “we believe oil prices are likely to remain range bound between rising US production on the high side and OPEC production cuts on the low side,” said Haworth.

Major stakeholders including Saudi Arabia also appear confident of the medium- to long-term scenario. Ahead of the closed-door meeting, Energy Minister Khalid Al-Falih told CNBC that «nine months with the same level of production that our member countries have been producing at, is a very safe and almost certain option to do the trick.»

“There have been suggestions (of deeper cuts), many member countries have indicated flexibility but … that won’t be necessary,” Falih expressed confidence even before the meeting. OPEC also appeared sending a clear message to the market that it will seek to curtail its oil exports. Pointing out the resolve, Falih added that Saudi oil exports were set to decline steeply from June, thus helping to speed up market rebalancing.

During a post-ministerial news conference Thursday, Al-Falih insisted he was not concerned by daily market moves and that seven weeks of declines in US crude supplies and drops in floating oil storage are “excellent” news. He re-emphasized that the goal of rebalancing the market’s supply with demand was already in hand.

OPEC has a self-imposed goal of bringing stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion. “We have seen a substantial drawdown in inventories that will be accelerated,” Falih said. “Then, the fourth quarter will get us to where we want.”

Referring to the original output cute deal in November, Falih pointed out that “in the absence of that agreement, the market would have been aimless.” He was certain, the market would make “a full recovery”, but that more time was needed.

Others too, seem to second him. «Compounded by seasonal demand growth, the cuts should help accelerate global inventory drawdowns over the balance of the year and will likely set a new floor for crude oil prices in the low $50 per barrel range,» Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions said in a statement.

In light of OPEC agreement, oil prices would firm up in the weeks and months ahead, once could now say with some conviction.

And with this, my almost half a decade long association with the Saudi Gazette in the form of weekly ‘Energy Outlook’ comes to an end. Analyzing and dissecting the global energy conundrum, week after week, through ‘Energy Outlook’ kept me literally on toes. This has been a wonderful and exciting experience and I enjoyed every bit of it. The pleasure had always been mine.

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