Russia-Saudi-Led Oil Deal Makes Prices Rise Despite US Shale Output Boost

 

MOSCOW (Sputnik), Anastasia Dmitrieva - OPEC and their non-OPEC allies, led by Saudi Arabia and Russia, have succeeded this year in setting in motion the process of rebalancing the oil market, with crude prices increasing and inventories returning to the five-year average despite the US boosting shale oil production.

As Organization of Petroleum Exporting Countries and 10 non-cartel oil producers reached a deal in December 2016, agreeing to cut oil output by a total of 1.8 million barrels per day in an effort to stabilize global oil prices, oil exporters had little doubt that there would be no need to prolong the six-month agreement beyond June 2017. However, the stock build-up together with lower-than-expected demand in early 2017 has put the alliance in a sensitive situation, requiring once again uniting their efforts on the market rebalancing.

Reverse Effect of Oil Output Cut Deal
The first six months of the 2017 proved to be quite difficult for the oil industry. Reacting to the Vienna oil cap deal, parties to the agreement hastened to raise their production to record levels in the last month of 2016 until the cap came into effect in January 2017.
Meanwhile, compliance with production cuts was far from perfect in the first few months of the year. OPEC started with cutting its collective production by 1 million barrels per day (mb/d) in January, compared to the promised 1.2 mb/d, representing a 90-percent-conformity, according to the International Energy Agency (IEA).

As for non-OPEC states — Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, South Sudan and Equatorial Guinea, which joined OPEC later in May — their compliance seriously lagged behind. Initially, 11 states cut their production only by 192,000 barrels per day (bpd) in January, leading to compliance of 40 percent. Non-OPEC’s February conformity level was even worse – at 34 percent — due to rising output from Kazakhstan and Sudan/South Sudan, as well as due to Russia’s production cut of a little over 100,000 bpd being essentially unchanged, compared to January, against the benchmark October 2016 reference production. The situation slightly changed for the better in March and April, with compliance rates for non-OPEC at 51 percent and 66 percent respectively, according to the IEA.


The euphoria from the Vienna deal also resulted in the Organisation for Economic Co-operation and Development (OECD) petroleum stocks being virtually unmoved. In March, they stood at 3.013 billion barrels, which was 276 million above the latest five-year average, according to OPEC. Consequently, the world oil demand growth in 2017 was revised downwards by the IEA from 1.5 million barrels per day to 1 million barrels per day in the first quarter of the year.

Moreover, Libya and Nigeria, OPEC states that were granted exemptions from production quotas due to conflicts on their territories, started to quickly build up speed of recovering oil production. Compared to 2016 levels of 390,000 barrels per day, Libya’s output increased almost twofold, to 656,000 barrels per day already in the first quarter of 2017.

All these factors caused OPEC and non-OPEC states to review their plans during a bi-annual conference in May, agreeing to extend production cuts by nine months until April 2018 and preserving the same quotas on crude output in order to reach the deal’s main goal – to reduce the OECD stock overhang to the five-year average. As of May, crude inventories were still 250 million barrels above that level.

"The production cuts themselves are actually quite small. The agreement between the OPEC and non-OPEC countries meant that they would no longer increase their own production in order to protect market share. This and oil demand increase provide time for supply and demand to rebalance and reduce bloated inventories," Edward Chow, Senior Fellow at the Washington-based Center for Strategic and International Studies, explained to Sputnik.

US Shale on the Rise
In June, the Brent crude oil prices had been trading about $45 per barrel, hitting a 7-month low, with the July prices being at an average of some $48 per barrel, despite record conformity levels of OPEC and non-OPEC participating producers of 106 percent.
The decrease in the oil prices took place against the backdrop of the growing oil output of the US shale producers, as well as of the production of the countries not party to the 2016 Vienna agreement. The US production was slightly contained in late August, when hurricane Harvey temporarily disrupted output by around 800,000 barrels per day at its peak, but quickly recovered in the fourth quarter of 2017.

"Shale production in the US was one, but not the only factor in the collapse of oil price. But, that was when the oil price was very high. With the collapse of oil price, the shale production, as well as exploration, was reduced significantly in the US, to the point that the industry has lost over 200,000 jobs over the past several years. At this point, the oil price worldwide is not yet high enough to justify a gradual move back to the production and exploration of several years ago. But, this could change, of course," Muhammad Sahimi, the NIOC chair in petroleum engineering at the University of Southern California, told Sputnik.

So far, the United States boosted its production from 13.63 million barrels per day to average 14.24 mb/d in 2017, constituting an annual increase of 610,000 barrels per day, according to OPEC. But in 2018, the US production is set to increase even higher by additional 1.05 million barrels per day, raising fears that such a steep increase could undermine the effectiveness of the OPEC, non-OPEC agreement.

"The increased production from tight oil in the United States will cancel out the decreases due to OPEC cut," Xiaoyi Mu, reader in energy economics at the University of Dundee told Sputnik.
However, as world oil demand is set to reach a record 99.1 million barrels per day in 2018, compared with 97.8 mb/d in 2017, the US shale may actually be welcome in the oil industry to satisfy the growing demand.

READ MORE: Iraq Invites Companies to Take Part in Pipeline From Kirkuk — Oil Ministry
Although the United States remains the key driver of non-OPEC supply growth this year, other countries that have also upped their output include Canada with an annual increase of 300,000 bpd, Brazil with 180,000 bpd and Kazakhstan with the same increase despite being part of the Vienna deal quotas, according to the organization.

Russia, Saudi Arabia Union Saves the Deal
Oil prices have been steadily recovering since July with crude currently trading at over $60 per barrel, helped by reducing inventories and higher demand, as well as disruptions in the US production. Yet, another important signal for the market was Saudi Arabia and Russia uniting against the volatility and doubling their efforts to lead the OPEC, non-OPEC alliance for better conformity, which was especially evident during the Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC) held on July 24 in St. Petersburg.
Saudi Arabia for its part has continuously overperformed its obligations on cutting output under the Vienna deal, leading other OPEC members by example and urging lagging countries to step up, as the overall conformity level dropped to 98 percent in June. The following month, OPEC-non-OPEC even held a technical meeting with the UAE, Iraq, Kazakhstan and Malaysia in order to boost their compliance levels. Prior to the meeting, Saudi Energy Minister Khalid al-Falih held separate meetings with countries that are experiencing difficulties in limiting production.

© REUTERS/ Ismail Zitouny

 

Explosion Hits Oil Pipeline Leading to Libya's Port - Reports (PHOTO)

The two countries also raised the subject of Libya and Nigeria, who have been recovering output at a quicker-than-expected pace, joining the efforts of OPEC, non-OPEC at stabilizing the market. While Nigeria pledged to implement similar OPEC production adjustments as soon as its recovery reached a sustainable production volume of 1.8 million barrels per day, Libya refrained from promising the same. Meanwhile, Libya’s production hit over 1 million barrels per day, compared with 390,000 bpd in 2016, according to OPEC. The final victory for the efficiency of the oil output cap deal was in October, when Russian President Vladimir Putin announced that the 24 oil producers might consider extending the agreement until the end of 2018.

"The key to the 2017 agreement was the weight of the Saudi commitment plus the Russian support, however small and symbolic. The fact that Putin put his weight behind it, made it far more credible. So, really the cuts were not OPEC but Saudis plus close allies," Adi Imsirovic, a teaching fellow in economics at Surrey Energy Economics Centre (SEEC), told Sputnik.

Although it was necessary to extend the Vienna deal beyond March 2018 in order to give time to the OPEC-non-OPEC alliance to get rid of the crude stock overhang, the market expected the decision on extension only in early 2018, as Russian Energy Minister Alexander Novak said the extension should be voiced no earlier than January 2018.
And yet, on November 30, the 24 major oil exporters have unanimously agreed to extend the agreement on the reduction of oil output by another nine months until December 31, 2018. Moreover, Libya and Nigeria pledged to keep their levels of oil production in 2018 from exceeding the results in 2017 in order to avoid "market surprise."
"A large part of the decision to extend the production cuts of this year is purely political … But, there is no doubt that, economically, all the oil exporters have benefited from the production cuts, and politics aside, a re-balancing is needed, given the drastic fall of the oil price over the last few years," University of Southern California's Sahimi explained.
Given that OPEC is likely to surpass its pledged cut of 1.2 million barrels per day in 2018, according to the Saudi minister, the rebalancing process might go even quicker.
Rebalancing by mid-2018?
Next year, all eyes will be on the level of global oil inventories, as it is the main indicator of the OPEC-non-OPEC’s deal effectiveness, according to Falih, and thus the signal of the completed process of market rebalancing.
While it took roughly a year to reduce the crude overhang by half, from 340 million barrels to around 140 million barrels, the process of getting rid of the rest of inventories and returning to the five-year average may require much less.
"Inventories will continue to decline fast as market is heavily backwardated and it costs a lot of money to store oil," Imsirovic noted.

READ MORE: French Parliament Passes Law to Abandon Oil, Gas Production by 2040
Another indication that market rebalancing has gathered pace is the upward revision of global oil demand growth, which now stands above 1.5 million barrels a day for both 2017 and 2018.
Taking into account these factors, OPEC-non-OPEC are expecting to achieve the goal on the inventories level as early as in the second-third quarter of 2018, which explains why they left some wiggle room and agreed to review necessity for production cuts in June 2018. However, not everybody shares their optimism on witnessing a quick stock draw.
"Current projections show that global crude oil inventories will not be reduced to historical average level until the end of 2018, so it appears necessary for the current agreement to remain in place if the objective is to ‘rebalance’ the market," Chow warned.
On a more positive note, experts agree that the worst days of oil prices below $40 are over for the time being and crude will trade at an upper limit of $60 per barrel in 2018, a prediction that goes in line with forecasts of OPEC-non-OPEC ministers that put the pricing in the range of $50-60 per barrel.
However, tensions in Venezuela, the Middle East and elsewhere might worsen in 2018 and consequently cause crude oil price to rise higher than $60, making the US shale oil once again highly competitive.