Wood Mackenzie explains when oil price is too high

Baku, Azerbaijan, Dec.11

By Leman Zeynalova – Trend:

The decision of OPEC and some non-OPEC countries to extend the oil production cut deal until late 2018 is overall price-supportive, Ann-Louise Hittle, Principal Analyst, Macro Oils, Wood Mackenzie told Trend.

A nine-month extension was already built into the price in the weeks heading into the November 30 OPEC meeting. However, the decision is overall price-supportive because it means the global oil supply and demand balance will tighten during 2018, especially in the second half of the year,” said Hittle.

She pointed out that without the agreement, global oil supply would have increased by 2.4 million b/d year-on-year in 2018 and swamped projected demand growth of 1.4 million b/d.

The agreement is also price-supportive because it confirms Saudi commitment to rebalance the oil market, added the analyst.

Hittle noted that an adjustment to the agreement would be made if the oil price is too high.

“What OPEC considers too high was not made public at the OPEC meeting and has not been clarified. An example of such a scenario would be if oil demand turns out to be higher than forecast by the end of H2 2018, or oil supply is less than expected, and the oil price sharply higher than it is today,” she said. “In that case, the June 2018 OPEC meeting could lead to a decision to ease the production restraint currently in place to prevent oil prices from rising so strongly that world economic growth is hurt or alternative fuels to oil become economic.”

As for the reaction of US shale producers to the cut, the analyst said they do not act as a group so each company will have a different strategy in 2018.

“Stronger oil prices have already incentivized some US shale oil companies to increase their hedges for 2018 and support continued increases in the rig count. Other US companies have said they will stick to a strategy of aiming for an increase in shareholder value instead of only an increase in oil production volume. Overall, the agreement should bring a somewhat stronger price in 2018 and help support continued growth in US oil production,” said Hittle.

Wood Mackenzie is forecasting total non-OPEC oil production to increase by 1.3 million b/d in 2018.

“In terms of the impact the extension will have on oil industry investments, stabilizing oil prices has already affected the US tight oil industry where we have seen a surge in hedging activity late this year which enables these companies to lock in the recent higher prices and maintain spending levels in 2018,” said the analyst.

Hittle noted that globally the upstream industry can increase its spending although the focus is likely to remain on optimal deep water projects rather than higher cost and technologically challenging projects given the relatively low prices compared with those before the price collapse in 2014.

In addition, the industry generally is preparing for the longer term trend of slower oil demand growth post 2020, she concluded.


Follow the author on Twitter: @Lyaman_Zeyn

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