Return of oil prices to $60 requires multiple production losses - expert

Return of oil prices to $60 requires multiple production losses - expert

Baku, Azerbaijan, July 25

By Elena Kosolapova – Trend:

Additional production losses are required for a return of world oil prices to the level of $60 per barrel (bbl) and higher, Tom Kloza, Global Head of Energy Analysis in Oil Price Information Service (OPIS), owned by IHS research company, believes.

"Most likely, I see Brent crude trading broadly between $48-$52 bbl for the next nine months with WTI trading at perhaps $46-$50 bbl," Kloza told Trend by email.

He went on to add that if Venezuelan production is lost (it is a possibility thanks to potential sanctions or pure anarchy post-elections) these numbers might be raised by $1 bbl or $2 bbl.

"The case for a return to $60 bbl and higher would require multiple production losses (Nigeria, Libya, Venezuela, and a few others are prime candidates)," the expert said.

In late 2016 OPEC agreed to slash the output by 1.2 million barrels per day from Jan. 1, with top exporter Saudi Arabia cutting as much as 486,000 barrels per day. Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce the output by 558,000 barrels per day. The agreement was for six months period, extendable for another six months.

In May, all the participants of last year's agreement agreed to extend it to another nine months.

Yesterday a Joint OPEC-Non-OPEC Ministerial Monitoring Committee met in St. Petersburg to review the June 2017 report as well as the first six months of the Declaration of Cooperation. After the meeting the cartel announced that OPEC deal producing countries had achieved a conformity level of 98 percent in June 2017.

Same level of high conformity was observed for the first six months of January to June 2017. Between January and June 2017, the participating producing countries adjusted their production downwards by an estimated volume of 351 million barrels, OPEC said.

Kloza noted that it appears as though Saudi Arabia has agreed to do all the heavy lifting, and cut an additional 600,000 barrels per day of exports. However, according to the expert, this is a bit misleading since the Kingdom tends to reduce exports in summer and early fall months because of the need to generate power via crude as feedstock for the air conditioning season.

"So the cut, while significant, is not as considerable as it may appear to be," Kloza said.

Speaking about the influence of OPEC deal on the market in the next 9 months, the expert noted that it depends on its compliance from other OPEC members. According to Kloza, July has seen particularly poor compliance, and the countries that have produced over quota include Iraq, UAE, Qatar, and Kuwait -three of which usually adhere closely to the rules.

Commenting on oil production levels in Libya and Nigeria, both oil producing nations exempted from production cut to allow them restoring oil industry damaged in militant attacks, Kloza said that the "caps" put on output of these countries are well above likely 2017 production capability.

Earlier high representatives of Nigeria and Libya announced their plans to cap oil production at 1.8 million barrels per day and 1.25 million barrels per day in 2017, respectively.

"In 2018, Nigeria could ostensibly exceed the 1.8-million b/d cap and produce 2.1-million b/d if chaos does not return to the oil fields. Libya is probably not capable of sustaining production of more than 1-million b/d so the 1.25-million b/d cap is a bit meaningless," the expert said.

He also expects continued growth in US oil shale, and some new output in the North Sea, Russia and Brazil in the winter and spring months.

Kloza noted that probability of extension of oil output cut deal for a longer period is about 50 percent.

"The Saudis will not subsidize others’ production forever, and I doubt whether they will cut further," Kloza said, adding that the IPO of Saudi ARAMCO National Oil Company next year puts Saudi Arabia in a very difficult position in terms of strategy.

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