The OPEC+ agreement has stabilised the oil price
The Brent oil price, which fell to c$27 per barrel at its lowest point in 2016, has now held above $50 per barrel since the original OPEC and non-OPEC agreement in December. The latest IEA Oil Market Report (19th January) indicates that the crude oil price will rise significantly in the first half of 2017. This should drive share prices higher across the oil and gas (O&G) sector. A few key factors from the report and other sources are summarised below.
Supply has steadied
The original supply agreement in December supported the rise of global crude prices, and further production cuts are now expected in the first half of 2017 (announced after the IEA January report was published). It appears that all 13 OPEC countries and 11 non-OPEC countries have committed to reducing output further. However, Libya and Nigeria have received exemptions, as both OPEC members are suffering production challenges.
A monitoring committee and joint technical committee (JTC) have been set-up to monitor the deal, with Ministers reporting that 1.5m barrels per day have been removed from global markets so far. Interfax reports one Minister as saying that this figure could reach 1.7m barrels by February. Assuming full compliance, which does seem possible, global oil inventories could fall back to their five-year average by mid-2017, lowering the amount of oil in storage by c300m barrels. The current deal is only planned for six months but, due to its success in stabilising the market, an extension may be considered.
The result is that crude oil supply, the primary driver of prices, has stabilised and started to fall globally. This follows a multi-year period of dramatic supply growth that has weighed on oil prices for more than two years. However, it is anticipated that non-OPEC supplies will see overall growth in 2017.
High-cost production units are now under review
The increase in supplies in 2014-2016 were driven by new technologies, which brought previously unobtainable oil (including from Canada’s oil sands) to market while the oil price was high. The new low commodity-price environment is now impacting these same companies, whose revenue can no longer support the high-cost environments and production techniques. Some of these operations are now being wound down and rationalised. However, others (with lower cost bases) may ramp up production to match the oil price rise.
After a recent committee meeting, Ministers highlighted that any increase in the relatively high-cost US shale oil production (as a result of rising oil prices) will be absorbed by rising demand. Mohammed Al-Sada, the Energy Minister of Qatar, said that “shale oil will all be catered for” due to increasing demand.
Demand is increasing
In support of this view, the IEA has increased its global demand outlook. This has been driven both by abnormally cold weather across northern Europe and industrial output growth from key economies in Asia. Q1 2017 demand is expected to remain strong at 1.3m barrels per day (vs 1.5m barrels per day in Q4 2016), with the small decrease driven by the expected rise in oil price.
This should provide some breathing room for the O&G sector to stabilise further.