x Abu Dhabi, UAETuesday 12 December 2017

Opec agrees to extend oil production cuts to end of next year

Exporter group to continue with output limits subject to mid-year review as bid to balance market begins to pay off

The UAE's Oil Minister Suhail Mohamed Al Mazrouei at the beginning of an Opec meeting in Vienna, Austria. Heinz-Peter Bader/Reuters
The UAE's Oil Minister Suhail Mohamed Al Mazrouei at the beginning of an Opec meeting in Vienna, Austria. Heinz-Peter Bader/Reuters

Opec decided in principle to extend production cuts through to the end of 2018 subject to review mid-June at its annual meeting in Vienna.

Oil markets responded to the nine-month extension positively. Brent was hovering above US$63 a barrel at 7.55pm UAE time Thursday evening ahead of a joint statement by Opec and Russia, the largest producer outside of the grouping, a little below the $64.27 the markets witnessed earlier in the month following the outcome of the Kurdish referendum vote.

Late on Thursday evening, the producers group was still hammering out details on whether to cap output from North African producer Libya, which had earlier been exempt from cuts due to its civil unrest. Opec also decided to cap the output of Nigeria at around 1.8 million bpd, according to Reuters.

Opec’s consensus comes nearly a year after producers from the group and non-members decided to slash output by 1.8 million barrels per day (bpd) from the beginning of January to reverse a slump that pulled the price of Brent from $100 highs to under $29 at the beginning of last year.

Compliance among consenting producers stood above 90 per cent all year, with Arabian Gulf producers led by Saudi Arabia eager to cut more than their agreed share of the quota, as they looked to stabilise a market that cushioned nearly all of their government spending and budget.

Spencer Welch, the director for oil markets and downstream at London-based IHS Markit told The National in an emailed interview that said Gulf producers would probably target a $60 price through into next year as they balance spending commitments at home and move ahead with big-ticket projects in the energy sector.

“I think they would be happy around $60, given [the] price dropped down as low as $26 in 2016,” he said.

Opec’s strategy to lower OECD oil inventories has paid off. However, sustained production curbs need to be in place to ensure levels are maintained around their five-year average, Mr Welch said.

"They have made excellent progress but there is still more work to do. OECD industrial oil inventories were 340 million barrels above the five-year average at the start of 2017, but are now just 140 million barrels above the average,” he said.

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“However, some stock building is likely through [the fourth quarter this year and the first quarter of next year] because of lower demand and increasing US production, so Opec needs to keep the cuts in place,” Mr Welch added.

A big concern for Opec, however, is the resurgence of US shale, which is likely to flow back into the markets once higher prices are achieved.

For Gulf producers in particular, US shale flowing into markets where Middle East crude had long been dominant could be a bitter consequence of the output cuts.

US crude production is expected to rise by 712,000 bpd in 2018 from this year’s projected average increase of 377,000 bpd according to the US Energy Information Administration’s latest projections, diminishing the impact of future Opec production cuts.

“US crude has made major inroads into the Asian market this year, I expect that trend to continue in 2018,” said Vandana Hari, the founder and chief executive of Vanda Insights, a Singapore-based provider of analysis and research on oil markets.

"And it’s not just crude – US refined product exports are also spiralling up. They touched a record high of close to 6 million bpd in the week to November 24, according to the latest EIA data,” she added.

In October, US shale made its first ever entry into Indian markets after the state-owned Indian Oil Corporation unloaded a 1.6 million barrel shipment off the eastern Paradip port as buyers in Asia look for alternatives to geopolitically sensitive Middle East crude.

While Opec has helped manoeuvre the oil markets into comfortable price levels, shale’s continuing ascent is completely out of Opec’s hands, added Mr Welch.

“US production will continue to increase, it is already the highest in US history. It will continue to increase through 2018 and this is helped by the Opec deal because that is supporting price. This is inevitable, there is nothing Opec can do about this."