OPEC deal may push crude price above $75/b

Following months of global oil market angst, OPEC has pledged to cut its production by almost 1.5 million barrels per day (MMb/d), a greater target than proposed when the cartel last met in Algeria.

This first OPEC accord in eight years is designed to accelerate the rebalancing of a market that has shown some signs of tightening. Inventories could reach equilibrium in as few as six months, analysts say.

Critically, analysts at Barclays said in a research note, market participants may price this into their calculations before the actual inventories drop.

Barclays said that as a result, oil prices could increase with the emergence of evidence that the market is truly tightening.

“This is not to say that the current environment is easy for the industry, it isn’t but with OPEC back and effective, it does appear that the worst of the downturn has passed.”

A meeting on December 9 will confirm non-OPEC participation. The bottom line is that a chop of almost 1.5 MMbpd to volumes will get inventories down to normal levels by next summer, which would grow confidence that oil could price at $75 per barrel in 2017, David Pursell, Tudor Pickering Holt & Co. managing director, told investors.

What matters most about the arrangement, Pursell said, is in its suppositions. The Organization for Economic Cooperation and Development (OECD) inventories will return to normal in the third quarter 2017, if the deal holds. Oil prices will respond quickly to OECD inventory declines. And, OPEC assigned a ministerial committee to monitor implementation and ongoing volumes.

“Compliance should be high, but naysayers will suggest OPEC will cheat. History suggests that compliance is high initially and does erode over time as oil prices increase,” Pursell said.

The International Energy Agency (IEA) has estimated that as a group, OPEC currently produces 33.8 MMbpd. In the September meeting in Algiers, the cartel said member nations would target dropping that volume between 32.5 MMbpd and 33 MMbpd.

Designed to boost the oil market’s recovery, the production drop will “accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward,” OPEC said in a statement November 30.

World oil demand is expected to grow by about 1.2 MMb/d this year and in 2017. OPEC said that underscores that a market rebalancing is underway, but both Organization for Economic Co-operation and Development (OECD) and non-OECD inventories remain well above average. Given the inventory overhang, a lack of investment in 2016 and 2016, as well as massive industry layoffs, OPEC said it’s vital that stock levels are brought down.

However, non-OPEC Oman will attend the oil producers’ meeting with OPEC in Vienna on December 10, the energy minister of the Gulf sultanate said on Sunday. It hopes non-OPEC countries will contribute another 600,000 b/d to the cut. Russia has said it will reduce output by around 300,000 b/d.

Omani oil and gas minister Mohammad bin Hamad al-Rumhy told reporters that non-OPEC producers’ current discussions to cut between three and four per cent of their oil production, is less than what Oman was ready to reduce output by. He declined to comment on how much Oman is prepared to cut output, but Oman has previously said it would be willing to cut production by five to 10 per cent.

Rumhy said he expected oil prices to rise to a range of $50-$60 a barrel in 2017 after the global oil limiting supply agreement. Oman’s oil production is around 1 million b/d.

Rumhy who is also the chairman of Petroleum Development Oman (PDO), the country’s top oil and gas exploration and production company, said PDO’s expected investments next year will be around $4 billion.

“Recently, we were discussing the amount PDO plans to borrow next year. It will be almost the same as this year’s loan. Between $3-$5 billion,” he said.

In June, PDO said it obtained a $4 billion loan from international banks, part of a rush of foreign borrowing by Oman as low oil prices strain state finances.

The five-year pre-export facility was the company’s first international loan and was priced at 160 basis points over the London interbank offered rate (Libor).