Long-term crude oil prices unaffected by OPEC output cut – analysts

LONDON (ICIS)–OPEC’s agreement to cut oil production, as well as the potential that non-OPEC counties will also cut production, will help accelerate market re-balancing and improve chances of a rapid oil recovery, according to sources on Thursday.

The Organization of Petroleum Exporting Countries (OPEC) reached on Wednesday an agreement to curb production by 1.2m bbl/day, starting on 1 January 2017.

However, most sources expect that the spike in oil prices will only be a short-lived one, with medium- and long-term outlooks remaining unchanged.

“The impact of OPEC’s decision to cut oil production is overstated. Whilst this is the first agreement to cut output in eight years, the deal will be hard to police,” said Jayesh Parmar, analyst at Baringa Partners.

“It is also based on the expectation that major non-OPEC countries such as Russia will voluntarily reduce their output. Oil prices may spike in the short term but I don’t expect them to be sustained.”

The issue of US shale production having an effect on oil prices is a common theme across the board with both US’ credit rating agency Fitch and fund Global Asset Management (GAM) citing it in their reactions to Wednesday’s agreement.

“We keep our price forecast for 2017 at $60/bbl. Global oil inventories have stagnated or declined over the past six months, pointing to a balanced supply/demand situation,” said Roberto Cominotto, portfolio manager at GAM.

“The announced OPEC production cut will result in an oil market supply deficit in early 2017 which will drive inventories lower and prices higher.”

However, Cominotto added GAM’s medium and longer term outlook remains unchanged, adding that the “unprecedented investment cuts” made by global major oil producers have actually impaired oil supply capacity for several years, with the brunt of this beginning to impact in 2017.

“We expect global oil supply to stagnate or slightly decline over the next 3-4 years, while daily oil demand grows at a rate of 1m to 1.2m bbl. This will keep the oil market in a tight supply situation until the end of the decade or even longer,” said the analyst at GAM.

“Market participants are sceptical that the oil price recovery can continue on fears of US shale oil flooding the market when prices approach $50/bbl. In our view, this overestimates the impact of US shale oil production on the global oil market.”

The reasoning behind those unfonded fears would be, according to Cominotto, that US shale oil producers only represent 5% of the world’s oil production, meaning they would need to grow their output at “a dramatic rate” to have a strong impact on the global oil market.

“We only foresee this scenario if oil prices trade around $70/bbl for a sustained period,” he concluded.

As well as the risk of US shale production, credit rating agency Fitch added there are several factors which could derail OPEC’s plans agreed on Wednesday, potentially undermining the success of the agreement.

“Significant risk remains that OPEC members will produce crude above quotas, as has happened in the past. This could slow market rebalancing,” it said.

“Another unknown is how quickly the US short-cycle crude production will react to higher oil prices. US shale production has already begun to bounce back from recent lows, and may accelerate at prices above $50/bbl. In addition, the deal is for six months, and there is no guarantee OPEC members will reach a consensus to extend it.”

As a consequence, Fitch said its long-term crude oil forecast would remain unchanged for the moment as long-term prices would depend more on “marginal cost of supply” rather than production volumes.

“Costs vary enormously over time, with geology, geography, engineering solutions, and the demand-supply balance in services markets major contributors. Our latest full-cycle costs research suggests that $65/bbl is a reasonable estimate,” concluded Fitch.

Crude oil futures continued gaining ground on Thursday’s midday trading in Europe, with the international referential Brent trading above the psychological mark of $50/bbl at $52.46/bbl and the US referential WTI trading at $49.94/bbl, up 50 cents/bbl.

Pictured above: Petroleum Highway in California
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