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Page added on December 1, 2016

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Crude Cut Could Push Oil to $75 Per Barrel in 2017

Production

Following months of global oil market angst, OPEC has pledged to cut its production by almost 1.5 million barrels per day (MMbpd) – a greater target than proposed when the cartel last met in Algeria.

This first OPEC accord in eight years is designed to accelerate the rebalancing of a market that has shown some signs of tightening. Inventories could reach equilibrium in as few as six months, analysts say.

Critically, analysts at Barclays said in a research note, market participants may price this into their calculations before the actual inventories drop.

Barclays said that as a result, oil prices could increase with the emergence of evidence that the market is truly tightening.

“This is not to say that the current environment is easy for the industry – it isn’t – but with OPEC back and effective … it does appear that the worst of the downturn has passed.”

Details Of The Deal:

  • OPEC will reduce its production to 32.5 MMbpd – about 200,000 bpd more than initially proposed.
  • Saudi Arabia will cut the most – about 40 percent of the total – which comes to 500,000 bpd.
  • Iraq will adjust down by 210,000 bpd.
  • Russia, coy throughout the discussions, appears to have come onboard with a cut of 300,000 bpd.
  • No specifics on waivers for Libya or Nigeria. Indonesia suspended its OPEC membership.
  • The deal begins Jan. 1 and runs fox six months. Production levels will hold if market conditions dictate it.
  • A meeting Dec. 9 will confirm non-OPEC participation.

The bottom line is this: A chop of almost 1.5 MMbpd to volumes will get inventories down to normal levels by next summer, which would grow confidence that oil could price at $75 per barrel in 2017, David Pursell, Tudor Pickering Holt & Co. managing director, told investors.

What matters most about the arrangement, Pursell said, is in its suppositions. The Organization for Economic Cooperation and Development (OECD) inventories will return to normal in the third quarter 2017 – if the deal holds. Oil prices will respond quickly to OECD inventory declines. And, OPEC assigned a ministerial committee to monitor implementation and ongoing volumes.

“Compliance should be high, but naysayers will suggest OPEC will cheat,” Pursell said. “History suggests that compliance is high initially and does erode over time as oil prices increase.”

Vienna Sentiment

The International Energy Agency has estimated that as a group, OPEC currently produces 33.8 MMbpd. In the September meeting in Algiers, the cartel said member nations would target dropping that volume between 32.5 MMbpd and 33 MMbpd.

Designed to boost the oil market’s recovery, the production drop will “accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward,” OPEC said in a statement Nov. 30.

World oil demand is expected to grow by about 1.2 MMbpd this year and in 2017. OPEC said that underscores that a market rebalancing is underway, but both Organization for Economic Co-operation and Development (OECD) and non-OECD inventories remain well above average. Given the inventory overhang, a lack of investment in 2016 and 2016, as well as massive industry layoffs, OPEC said it’s vital that stock levels are brought down.

Is OPEC Back – Or – Did It Ever Leave?

Criticism of OPEC and early decision to let the market work it’s will and rebalance itself had reached a pitch that questioned whether the 56-year-old organization could be relevant in the post-shale revolution market. That answer is mixed, but largely, affirmative.

“Two years later a much more cohesive OPEC has re-emerged as a force prepared to call upon non-OPEC as well,” Barclays said.

But there are other issues to consider that may alter OPEC’s scope. In the short term, how U.S. shale producers respond will be a factor. The adherence of other non-OPEC producers can also have a role, said Michael Burns, a global energy partner at Ashurst LLP.

Without a doubt, OPEC still has influence, Burns said. And part of what makes this deal remarkable is that it shows the cartel is willing to change course.

“The idea before was to produce as much as possible and now, it’s not to produce as much as possible,” he said.

But ascertaining OPEC’s impact is weeks, months – even years – away, Burns said, as normalized inventories move the level of oil prices.

“If that level is enough for some of the shale producers to make money, then they may well turn the taps on and you may see an adjustment to the price,” he said. “It’s only then that we’ll be able to see the power that OPEC has. To take the logic on, if shale depressed the price again, then OPEC would have to cut further, and the question is, would they be prepared to do that?”

The initial reaction from the oil market was to jump about 8 percent – tantalizingly, just slightly above the $50 per barrel mark – but it won’t necessarily last.

“It’s a big increase on a daily basis, but the point is, that’s only back to the level it was when the conceptual deal was announced in Algiers a couple of months ago,” Burns said. “I’m not sure that what is happening here is going to make a remarkable difference going forward. But I think it does hopefully give a bit of stability – at least in terms of knowing where OPEC stands.”

Showing that OPEC is prepared to reduce supply sends out a strong signal to give stability to prices.

“But I don’t think it gives the signal that we need to see $70 prices tomorrow,” Burns said. “I suspect it may give stability for a period rather than any rapid increase.”

RIGZONE



23 Comments on "Crude Cut Could Push Oil to $75 Per Barrel in 2017"

  1. shortonoil on Thu, 1st Dec 2016 6:40 am 

    The market is reacting on the assumption that OPEC will actually cut production by 1.2 mb/d. The price jumped a little on the news, and if OPEC actually cuts their revenue will have gone down. The price has to go up enough to compensate for the lost sales from the cut. So far that hasn’t happened.

    Rig Zone must have dug out their old ECON 101 textbook. They are convinced that it is all about supply and demand measured in barrels; and it is — until it isn’t.

    When it isn’t anymore, it is all about net energy delivery.

    http://www.thehillsgroup.org/

  2. onlooker on Thu, 1st Dec 2016 7:20 am 

    The price has to go up enough—yes, if it does go up say to the $75 dollars that will break the Economy and it will go plummeting back down. That is why Short and others have said it is just something temporary that cannot be sustained, the dynamics and mechanics of Net Energy are relentlessly making both the Economy and the Oil price go down.

  3. Danlxyz on Thu, 1st Dec 2016 9:22 am 

    Lets do the numbers for KSA:
    11-30 am price $46.40 x 10.5 = $487 million
    12-1 price now $51.80 X 9.3 = $482 million

    Not quite there yet. It looks like another $.50 to break even but they will still have 1.2 additional bbls in the ground.

  4. Outcast_Searcher on Thu, 1st Dec 2016 9:39 am 

    shortonoil said: “The price has to go up enough to compensate for the lost sales from the cut. So far that hasn’t happened.”

    Or, contrary to short’s opinion, supply and demand do matter, and microeconomics continues to operate, as it has throughout written history.

    The oil price doesn’t “have” to do anything, just because short wants it to or believes it will. The market (based ultimately on supply and demand) will decide over time.

    Meanwhile, KSA and OPEC have a finite amount of oil. If they can sell it for more (especially lots more) per barrel, and leave some in the ground for the future, it’s to their benefit.

    They know this. Since they couldn’t crush the US oil fracking industry out of existence, time to change the game and try for more balanced prices.

    And the first world can afford $75 oil just fine, just as it afforded nearly $100 a barrel for four years running recently just fine.

  5. denial on Thu, 1st Dec 2016 9:51 am 

    Yes I agree the market can and will support $75 a barrel of oil because it has to….it does not have a choice….Get it up to $100 a barrel and then you have a problem that I think will manifest into an American president saying a lot of crazy things and doing a lot of crazy things…in the end I think the big powerful countries will just drain more out of the smaller countries and the band will play on.

  6. onlooker on Thu, 1st Dec 2016 10:05 am 

    Both of you conveniently discount the logic built into the ETP Model. The Oil situation does not respond to classical supply/demand signals because one, the lack of Net Energy available to the Economy does not allow demand to be increased in respond to a lower price or oversupply and two precisely because we have reached a stage whereby the ironclad limitations of depletion and thermodynamics is decreasing the amount of Net Energy available to the Economy

  7. Mark on Thu, 1st Dec 2016 10:18 am 

    I’m not so sure that the ‘customers” can afford $75/bbl oil. The worlds economies are barely holding it together now, teetering into recession now. Will be curious if OPEC actually deliverers on the cuts.

  8. rockman on Thu, 1st Dec 2016 10:22 am 

    Always amazing to see such absolute certainty that only the global volume of oil production determines the price of oil. Completely ignores numerous examples proving that is not true. From 1999 to 2006 global oil production increased from 66 mm bopd to 73 mm bopd…an INCREASE OF 7 MILLION BBLS OF OIL PER DAY. And Brent spot oil price INCREASED from $18/bbl to $66/bbl.

    How could oil prices increasing more the 3X cause global oil production to increase more then 10% if the global production rate is the only factor controlling the dynamic? Obviously the condition of the global economy is a factor. So maybe reducing Saudi production might increase the price of oil. But it is possible that the price not only doesn’t increase but might decrease a bit. After all during the bust in the 80’s the KSA year after year reduced its production only to see prices not only stagnate but actually decline at times.

    OTOH if the global economy is about to improve significantly it might push the oil price upwards. And might have done so without an OPEC production decrease. The time lags within the dynamic makes correlating cause and effect difficult.

  9. joe on Thu, 1st Dec 2016 10:52 am 

    The deal they struck is obviously no deal. Today Saudi is claiming Iran hacked their airports. Nobody will cut, especially not Russia and tight oil wells sitting ready to be uncapped for this very day will pump like mad. So Opec will go back to last years levels, they are not even 50% of the supply anymore. Trump will be happy if he can export oil at higher prices with a strong dollar. Saudi will lose massive market share as buyers seek out desperate sellers like Venezuela hoping to cash in. Its a disaster for Saudi. Iran beat their socks off.

  10. Boat on Thu, 1st Dec 2016 11:08 am 

    Rock,

    If your numbers are right that is a rise in production of 1 Mbps which is low compared to an avg of 1.3. Take production from 1950-2015. Do the math.

  11. GregT on Thu, 1st Dec 2016 1:08 pm 

    “Do the math.”

    Says the guy who thinks that a billion barrels of oil lasts 10 years.

  12. Lawfish1964 on Thu, 1st Dec 2016 2:29 pm 

    Customers can afford $75/barrel oil just fine. What’s the alternative? At $3.00/gallon, you’re paying $3.00 for the equivalent of 2,000 hours of manual labor. Still a helluva bargain even at four times that price. High prices will necessarily depress demand, which will lower prices, and on and on the cycle goes until it’s all gone.

  13. penury on Thu, 1st Dec 2016 2:42 pm 

    Customers can afford $75/barrel of oil just fine.Really? Which consumers? Industry? or the consumers who have to buy fuel to get to where they can purchase items which cost much more because the price of fuel went up while wages went down? Or is it in your income level in the country you live in, you can afford it? Like climate local conditions do not reflect the economy.

  14. Lawfish1964 on Thu, 1st Dec 2016 4:00 pm 

    My point is that $3.00 for 2000 man-hours of work is cheap and always will be. “Consumers” of petroleum will simply have to adapt to using less of it. If I cut my petroleum consumption in half, I would still be living an extraordinary lifestyle.

  15. rockman on Thu, 1st Dec 2016 4:36 pm 

    Boat – “Do the math.” Everyone can do the math if they chose. But it won’t change the fact that economic viability has an impact on the price of oil (both increasing and decreasing it) which can override the price/volume relationship. One can cherry pick any time frame just as I did to make both sides of the argument. But that only supports my proposition that there is not, never has been and never will be a one to one relationship between price and production volume. I’m not predicting it, since the Rockman avoids doing so, but if in several years the global economy sinks into a recession production might fall to 85 mm bopd and the price might be lower (maybe much lower) then it is today.

    For some reason certain folks like to ignore the FACT that in 1998 the spot price of Brent was LESS THEN $13 PER BBL when global production was only 67 mm bopd. Even adjusting for inflation the price in 1998 was still less then half the current price.

    Be nice if someone here could whip up an Excel chart that normalized the relationship between price and volume. Like the ratio of volume/price over time. For instance:

    1979 – 0.5 mm bbl/$ (infl. adj)
    1990 – 2.5 mm bbl/$ (infl. adj)
    1998 – 5.2 mm bbl/$ (infl. adj)
    2007 – 1.0 mm bbl/$ (infl. adj)
    2012 – 1.0 mm bbl/$ (infl. adj)
    2016 – 2.1 mm bbl/$

    So what do such trends imply…if anything?

  16. Sissyfuss on Thu, 1st Dec 2016 4:39 pm 

    Rock, does your economic viability have any relationship with decreasing net energy?

  17. rockman on Thu, 1st Dec 2016 4:44 pm 

    “Customers can afford $75/barrel oil just fine.” Hell, the Rockman can easily afford $150/bbl. And there are tens of millions of others that could also. So what? There are hundreds of millions who can’t afford very much to any oil at the current price.

  18. rockman on Thu, 1st Dec 2016 4:52 pm 

    Sissy – “…does your economic viability have any relationship with decreasing net energy?” Probably. That’s really a point I’ve often pushed: trying to analize such a complex dynamic by pulling out individual components and then debating them as if they exist in a vacuum typically seems a waste of time IMHO.

  19. makati1 on Thu, 1st Dec 2016 6:59 pm 

    Lawfish, Filipinos live on about 1/20th the oil that the U$ does and they manage quite well with all they need and have happy, healthy lives.

    Money is NOT a good measure of happiness or life unless you are a Westerner with no life or happiness outside of money.

  20. Lawfish1964 on Fri, 2nd Dec 2016 7:51 am 

    Then you and I agree, Mak. The argument that US consumers “can’t afford” $75 oil is really that $75 oil will not allow US consumers to continue driving gas-guzzling SUV’s and live the suburban sprawl lifestyle they’ve come to believe is their birthrite. When they downsize their vehicles and electrical consumption, they’ll be able to afford $75 oil.

    And I don’t measure my happiness by money. I drive a 16 year old car and wear totally ordinary clothes and no jewelry. I don’t take expensive vacations and almost never fly.

  21. makati1 on Fri, 2nd Dec 2016 8:21 am 

    Lawfish, we agree that Americans greatly over consume. That too will soon come to an end, but it may end in the greatest Depression ever. We shall see.

    We live a similar ‘thrifty’ lifestyle. I no longer own a car. I have flown back to the US once a year to visit my mom, but she passed this year, at age 89, so I do not expect to go back, ever. I did not leave anything there that I need to go back for.

    If you have two minutes, I would suggest that you watch this:

    https://www.youtube.com/watch?v=ENd5EBWLXJU

    “A Generation That Has Never Been Told ‘No'” Daniel Hannan Destroys Anti-Trump Protestors’ Safe Spaces”

    THIS is why the U$ has no future. A generation of selfish, wimpy, immature, uneducated ‘snowflakes;. Can you imagine if they had to reinstate the draft to ‘protect’ the lower 48? Would they find enough mature, healthy men to even form an infantry company? LMAO

  22. Boat on Fri, 2nd Dec 2016 9:54 am 

    The price of fuel consumption has a much smaller impact than the price of the car itself. Health care cost has more impact than the price of fuel. A house with insurance and taxes may cost a family $2,000 a month and $300 a month to heat and cool it. Get the drift? While energy costs are important they are down on the list when compared to other costs.
    If needed a large chunk of many countries could downsize in areas to pay for much higher fuel prices/electric car if drastic measures were taken.
    This is one reason I could not buy into a collaspe theory.

  23. GregT on Fri, 2nd Dec 2016 11:01 am 

    “While energy costs are important they are down on the list when compared to other costs.”

    All of those other expenses are impacted by the price of oil Boat. Get the drift? Not likely.

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