Is This The Beginning Of A Turnaround For Oil Prices?

by Trefis Team
Exxon Mobil
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The commodity downturn that began in mid-2014 has weakened the fundamentals of the oil and gas industry in a manner that any unforeseen event, whether big or small, tends to create volatility in the global markets, causing the commodity prices to oscillate rapidly. The latest event to impact oil prices is the ongoing conflict between Saudi Arabia and Iran, which has come to light due to disturbed ties between Saudi Arabia and Lebanon.
While it is difficult to judge the exact magnitude of the impact, the market expects the tension between the two Middle Eastern countries to reduce the crude oil supply from the region, contributing to the supply gap being created by the production cuts implemented by the Organization of Petroleum Exporting Countries (OPEC) and some Non-OPEC members since the beginning of 2017. This view has served as a good news for the industry, causing crude oil prices to cross the $60-per-barrel mark for the first time in the last two years.
However, nullifying the impact of the supply cuts implemented by the OPEC members, the US oil production has grown almost 13% in the last one year. The US average daily oil supply has reached 9.6 million barrels per day (MMbpd), which is a figure last seen in July of 2015. Also, the country’s oil stockpile has declined by merely 5% since November 2016, when the OPEC supply cuts were announced. To top this, the oil inventory levels in the country have started to rise again in the last two weeks and have reached a level of 1,928 million barrels. While it is fair for US oil and gas companies to capitalize on the improving commodity prices, the nation’s rising oil supply is a cause of severe concern for the OPEC members, who have been trying to strengthen oil prices by restricting their production.
Besides, with the ongoing tussle between Saudi Arabia and Iran, things seem to be getting worse for the OPEC nations. As Iran is exempted from the current production quotas, the market expects the latter to ramp up its oil production to protect its share in the oil market. However, this is likely to put some pressure on Saudi Arabia, which is the most powerful member of the oil cartel and is leading the production cuts, to intensify its own output cuts in order to keep up the pace of recovery in crude oil prices. Since the country is already taking a majority share of the output cuts, it may be difficult for the oil-dependent economy to further reduce its oil supply. That said, even if Saudi Arabia succumbs to the situation and magnifies its output cuts, it is likely to incentivize Non-OPEC producers, particularly the US, to further expand their oil output, offsetting the effect of the higher cuts.
While the investors are keen on hearing the cartel announce the extension of their production cuts beyond March 2018 at its next meeting, we expect the organization to maintain status quo on this topic for now. This is because the cartel has been unable to ensure 100% adherence to the terms of the production cut agreement from the member countries. Further, as the US oil production and inventory numbers continue to grow, it will become increasingly difficult for Saudi to convince Non-OPEC members, such as Russia, to participate in further production cuts. Thus, we believe that Saudi Arabia is currently in a very tricky position and has to be well prepared for the upcoming OPEC meeting in Vienna on 3oth November.
Based on the above mentioned events and their possible impact, we have reviewed our oil price estimate for 2017 and beyond. We now expect Brent oil prices to average at around $55 per barrel by the end of 2017 and stay in the $60-$62 per barrel range in 2018. You can view our base case for oil prices here and create different scenarios using our interactive platform.
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