Baku, Azerbaijan, May 26
By Leman Zeynalova – Trend:
OPEC's appetite to extend cuts further into 2018 may be reduced if crude stocks remain resilient and market prices subdued, Fitch Ratings says.
OPEC could decide to return production to pre-cut levels as the cartel may not want to lose its market share and look to raise revenues through volumetric growth, according to the analysis.
Regarding OPEC's decision to extend production cuts by nine months, the analysts believe that this should provide some support for oil prices around the average year-to-date levels and help digest a significant part of excessive inventories during the rest of the year.
However, a production surplus could return in 2018 if the deal is not rolled over again, as new projects continue to come online and US shale production is set to grow, according to Fitch.
“We believe average annual prices for the year are likely to remain around $50-$55 per barrel for Brent, given impressive US shale production growth, and potentially worse compliance with the output cuts than in the first half of 2017,” said the analysis.
US production could be up to 800-1,000 million barrels per day higher year on year by end-2017, according to the Fitch forecasts.
“This is half of the roughly 1,800 million barrels per day taken off the market by the OPEC-led cuts,” said the analysis.
Fitch's base case expectation is that the market will gradually recover, leading to Brent crude market prices in the mid-$50 range in 2018 and at around $60 in 2019.
This is likely to come from a combination of steady demand growth and an improvement in crude stocks, the analysts believe.
“Long-term oil prices will depend on whether US shale, with its short investment cycle, will be able to fill any potential supply gaps in 2019-2020. Our current long-term assumption is $65 per barrel for Brent,” said Fitch.
OPEC held its 172nd meeting on May 25, followed by the 2nd OPEC and non-OPEC ministerial meeting in Vienna, Austria.
OPEC member countries and non-OPEC parties, Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, and the Republic of South Sudan have agreed to extend the production adjustments for a further period of nine months, with effect from July 1, 2017.
The reductions will be on the same terms as those agreed in November.
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