September 30, 2016
A commentary by Bjørnar Tonhaugen, VP Oil Markets, Rystad Energy
On 28 September, OPEC issued a statement following the Extraordinary Meeting on the sidelines of the International Energy Forum, stating, “The Conference opted for an OPEC-14 production target ranging between 32.5 and 33.0 mb/d, in order to accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward.” Contrary to news flow leading up to the meeting, OPEC essentially reached a consensus in order to reintroduce a “target” for their collective crude production, which was abandoned at the Dec-15 OPEC meeting. Based on our understanding, the deal includes exemptions for certain countries which have experienced production disruptions, including Nigeria and Libya. The OPEC committee will likely propose country-specific targets/caps on the remaining members’ production at the Ordinary OPEC meeting on 30 November.
On our numbers, OPEC’s announced production target range can be viewed more as a “freeze” of production levels rather than a “cut”. Based on Rystad Energy estimates, current OPEC production in Aug-16 was in the middle of the stated range. We expect OPEC production to rise to ~33 mmbbl/d in Dec-16 in our base case, up from 32.7 mmbbl/d in Aug-16. This incorporates a 220 kbbl/d seasonal drop in KSA production from Aug-16 to Dec-16 due to lower domestic demand.
Now that OPEC has announced a consensus, the implications are that global oil balances would tighten significantly if the target range between 32.5 mmbbl/d or 33 mmbbl/d is adhered already from the beginning of 2017 (see chart below). In our base case for 2017, the Call-on-OPEC’s crude production rises from 33.3 mmbbl/d in 2016 to 33.9 mmbbl/d as global demand grows 1.1 mmbbl/d. In the scenario where OPEC produces 33 mmbbl/d already from Jan-17 and keeps production at that level during 2017, we expect large global stock draws of 0.9 mmbbl/d, all else equal. The global stock draws would average 1.4 mmbbl/d if production were to be kept at 32.5 mmbbl/d during 2017. This corresponds well with the stated objective of OPEC’s new production targets; namely to “accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward.” By adhering to this decision, OPEC would give away a share of global oil supply in 2017. US shale drillers will within few months regain a higher share of the market thanks to the high inventory of drilled nonproducing wells and to the large number of idled rigs. The residual effect on oil prices and stock draws could therefore be less significant than the immediate response.
It is too soon to know if and how OPEC will comply and arrange its new consensus policy within its member countries, including how much KSA will possibly restrain its production. Nevertheless, we believe OPEC is now in position to steer the pace of rebalancing of the market as we forecast that OPEC production growth is required to prevent large draws on oil stocks globally in 2017. We also believe the downside to oil prices in the short term has been reduced significantly after the OPEC announcement and we expect higher oil prices in 2017 than in 2016.
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