The impact of the OPEC agreement to curtail production is being felt on the market and the International Energy Agency says that oil demand will increase by 1.4mln barrels this year. In early trading on Friday, Brent crude was priced above US$56 with WTI heading towards US$54 a barrel.
The oil price was propping up the stock market this week as the NASDAQ hit record highs on the back of stronger than expected earnings.
The S&P Energy index was up 0.9 percent after US gasoline inventories fell.
Analysts had expected a gain in stocks, but the US Energy Information Administration reported a drawdown of 869,000 to stand at 256.2mln barrels.
Stocks remain high, but the market welcomes the lower trend as an indication that US consumption is getting stronger.
Commercial crude stocks rose by 13.8mln barrels to stand at 508.6mln barrels. The EIA says it expects global oil supply in 2017 to average 98.03mln barrels a day, with demand likely to be 98.09mln barrels a day.
Investment bank Goldman Sachs says that part of the US crude build-up seen recently is the result of an increase in imports, a trend that’s likely to reverse by the next shipping cycle. The expected crude transportation time from the Arabian Gulf to the US is approximately 47 days.
The bank also acknowledged that the oversupply is still a factor of concern on the market, but it added it expected a “gradual draw in inventories,” as many parts of the world was beginning to show “tightness.” Meanwhile the IEA says global stocks remain above the five-year average, saying the overhang needs to be cleared by mid-year.
The higher oil price is presenting a bit of a dilemma as US shale production is slowly on the rise, a factor that could keep a lid on oil prices in 2018, possibly around US$55 a barrel. In the shorter term, Goldman Sachs sees a possible “shift into deficit” for the global oil market in the first half of this year.
The EIA sees American production rising by 100,000 barrels in 2017 to 8.98mln barrels a day, less than what was previously forecasted, but rising to 9.53mln barrels a day in 2018. “US production is beginning to ramp up and could grab the market share released by OPEC,” says Spencer Welch, director at IHS Energy. He adds, “this could put the future of the deal into question.”
The other issue could become how much future production can be expected from Libya and Nigeria, as they were excluded from the OPEC deal because current production is below their historic average. “If either was able to recover production, then this will add further pressure to the deal.”
While the OPEC, non-OPEC cooperative cuts appear to be working their magic, the market is now looking toward the second half of the year and questioning the likelihood of a rollover. Its only 6 weeks since the cuts took effect and official numbers are yet to be released, but the market is getting anxious.
The Iranian news agency Fars, is reporting that Iran’s Oil minister Bijan Namdar Zanganeh is calling for a second cut in the second part of the year. At a news briefing in Doha, Qatar’s energy minister, Mohammed Al Sada took the diplomatic high ground and responded as expected, that “it’s too early to make a judgement.” Non-OPEC figures could take longer to determine according to Welch. “Russia’s reduction contribution, which is 50% of the promised non-OPEC cuts, will be phased in through the first six months of 2017.
The compliance levels from the non-OPEC contributing countries will take longer to become clear, because of data release delays.”
The OPEC monitoring committee should report with the help of independent January figures next week. Analysts surveyed by S & P Global Platts said that OPEC had achieved 91 percent of the required cuts in January with production down 1.4mln barrels a day.
The IEA has praised the group’s compliance. The shipping tracker cFlow estimates that production in Saudi Arabia is estimated to be down to 9.98mln barrels, the first time below 10mln barrels a day since 2015.
The market is buzzing with a drip-feed of news about the upcoming Saudi Aramco initial public offering. The consultants are busy in place and the company has been speculating about a multiple exchange listing for the 5%; on the Tadawul in Saudi Arabia of course, but also looking at Singapore, London and maybe even New York.
Saudi Aramco’s chief executive Amin Nasser spoke to Bloomberg this week and said that it’s not just the downstream sector that’s part of the IPO.
The Saudi Arabian government hopes to raise about US$100bn from the offering. International investment banks will be scrambling to assist, but for now Saudi Aramco surprised the market by appointing the 10-year-old independent boutique investment bank of Moelis & Co as an equity advisor.
The remaining international oil companies reported results this week with BP PLC (LON:BP.) disappointing the market but feeling confident it can manage any volatility in the year ahead. The full year results saw BP looking more encouraging with US$115mln as headline profit compared to a loss of US$6.5bn in 2015.
BP said it needs US$60 a barrel to break even in 2017. This year's results also included a Total of US$4bn relating to the 2010 Gulf of Mexico oil spill.
BP's CEO Bob Dudley said: "We have delivered solid results in tough conditions and are well prepared for any volatility in oil pricing.”
The French oil company Total saw its headline net profit rise 22% to US$6.2bn last year but revenues were down 9% to US$147.7bn. In the fourth quarter, Total saw revenues grow by 12% as oil prices rebounded after the OPEC agreement in November.
The CEO, Patrick Pouyanne said the market had not yet stabilsed and added he was expecting “some volatility” in the year ahead.
Volatility will likely be a feature of the oil market for years to come while signs of higher prices encourage the shale producers to increase production. For now, the market is optimistic and the hedge funds are back in action, but OPEC members needs to weigh up the possibility of further cutbacks while balancing their own domestic budget demands.