Extension of oil output cut deal to be supportive for prices - Wood Mackenzie
Baku, Azerbaijan, June 5
By Elena Kosolapova– Trend:
The extension of the oil output cut deal will have positive effect on oil prices in the near term, but in the long term it will face challenges, Alan Gelder, Vice President Refining, Chemicals & Oil Markets, EMEARC (Europe, Middle East, Africa, Russia and Caspian) Research at Wood Mackenzie told Trend.
“We expect the extension of the cuts to ensure a global stock draw for the second half of the year and a modest stock build in Q1 (as this is the quarter at which oil demand is at its lowest). We consider this to be supportive for prices in the second half of this year and to reduce the downward pressure on prices for 1Q2018,” Gelder told Trend by email.
However the long term perspective is that OPEC faces a dilemma, as the extension of the cuts provides further support to US tight oil growth, so reducing the flexibility for OPEC to return to full volumes without incurring a significant downward price impact, according to the analyst.
“A key aspect for the longer term is our outlook of annual oil demand growth slows, due to improving vehicle fuel efficiency, so oil price outlook is more driven by supply developments, so the balance between US tight oil production, non-OPEC supply growth and OPEC behavior,” Gelder said.
He noted that Wood Mackenzie expects high compliance with the proposed cuts during the extension as there is a high level technical committee focused on compliance monitoring. However, he went on to add that the challenges are around stronger US tight oil growth and supply returning from Nigeria and Libya, who are outside the agreement.
OPEC has 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 late May, all the participants of last year's agreement agreed to extend it to another nine months.
Gelder noted that from the pricing developments since the oil output cut deal was extended (oil prices fell slightly), it appears that the broader oil market was looking for the OPEC meeting to deepen cuts to counter the growth in US tight oil and the return of volumes from Libya and Nigeria and so secure an implied global stock draw.
“The challenges with extending the cuts rather than deepening them is the risks of unforeseen events derailing the expected inventory drawdown,” the analyst said.
The price for August futures of Brent crude oil hit $50 per barrel on June 5.