The best-case scenario for oil in 2017 is that the Organization of the Petroleum Exporting Countries (Opec) and non-member countries remain fully committed to the cuts in production announced after its 30 November meeting.
Richard Robinson, investment manager at Ashburton Investments, says that despite Opec’s image in the media, it has historically achieved fairly high levels of compliance (85%) when previous cuts had been implemented.
“Although we believe that the oil market is tightening and the inventory glut is going to reduce over the next year, the fast-forwarding effect that an Opec cut will have on this is undoubtedly positive for the 2017 oil price scenario,” says Robinson.
“The way in which Opec eventually announced the deal and its structure suggests that they have regained much of their lost credibility.”
Robinson suggests that this is most evident in Saudi Arabia conceding market share to Iran and allowing it to grow production by 190 000 barrels a day. Overall, Opec has committed to a 1.2m barrel-a-day cut, the first such agreement since 2008.
“We also believe that the architect of this cut, Saudi Arabia, which is taking on most of the share of the cut, is desperate to evoke a higher oil price as its economy is struggling,” says Robinson.
“Compliance is the key to whether they regain full credibility. However, we see a high likelihood of solid compliance due to the fact that Opec spare capacity is low and thus the opportunity to cheat is also low as many of the Opec countries, we believe, are operating at or near full capacity.”
Robinson believes further cuts could be on the cards. “Over the history of Opec cuts, they have on average cut by 4.1m barrels a day. The last cut they embarked on was 3m barrels a day between 2008 and 2009. They may consider doing this in order to normalise inventories before US production hits the market.” Non-Opec members agreed to a 558 000 barrel-a-day cut in early December.
Good news for African oil producers
PwC Africa Oil & Gas advisory leader Chris Bredenhann says the cut announced at the end of November was good news for Africa’s oil producers.
“Nigeria and Angola have really struggled with the low oil price,” says Bredenhann, and adds that Opec was sensitive to these countries’ plights and thus exempted them from the cut.
Nigeria has been the country worst affected in sub-Saharan Africa. It has seen a sharp decline in crude exports, while Angola had to revise its budget in 2015 due to low oil prices, cutting public spending by $414bn. Angolan inflation hit 40.04% year-on-year in October and speculation of corruption is rife after President José Eduardo dos Santos appointed his daughter Isabel dos Santos to run the state oil company.
The US needs a higher oil price
Oil prices immediately spiked after the announcement of the cuts by Opec. A higher oil price is good news for US oil producers, who have been hit hard by the low oil prices in 2016, with many filing for bankruptcy.
Some analysts are arguing that this tough period had made the US companies more resilient, forcing them to streamline their operations while searching for efficiencies. They argue that now, as they become more viable again due to a higher oil price, they will be fighting fit.
However, this remains to be seen. The US is facing a fairly tumultuous political time as Donald Trump prepares to become president. What will Trump’s term deliver on the energy front?
During the US election campaign Trump promised protectionist trade policies and the revival of fossil fuels. He said he was in favour of removing oil sector regulations and allowing companies to drill for oil on federal land. Whether he delivers on these campaign promises will have its own complications for the oil sector.
Recently, Damien Courvalin of Goldman Sachs forecast $55 per barrel for the first half of 2017, an update on the earlier forecast of $45 to $50 per barrel.
Fitch says it expects oil prices to flatline in 2017, averaging $45 per barrel, before moving up gradually after that. It is forecasting a $55 per barrel oil price for 2018 and a $60 per barrel oil price in 2019. Fitch attributes this to the high global oil inventories and the potential for US shale production to respond quickly to any tightening of the market.
This article originally appeared in the 29 December edition of finweek. Buy and download the magazine here.