Rating agency Fitch, after lauding OPEC’s decision to cut oil production by 1.2 million bpd, cautioned that prices are unlikely to move much higher than they are now, expecting them to “flatline” next year.
Fitch is expecting Brent prices to average US$45 per barrel in 2017, up just one dollar from the 2016 average—a figure which is still below the breakeven price for Saudi Arabia, OPEC’s heavyweight. This outlook expresses the sentiment that although the upward mobility is still ongoing today, it is unsustainable in the long run.
One of the biggest concerns for the agency is the uncertainty of the commitment of all OPEC members to the agreed cut, and in light of historical evidence, this uncertainty is well justified.
In November 2014, when prices began their dramatic slide, Saudi Arabia blocked efforts by other OPEC members to keep the ceiling on production in a bid to stop the slide. At the time, the group said in a statement that it had decided to roll over the 30-million-bpd ceiling to 2015. This was still 1 million bpd above OPEC’s production estimates for the year, and it was breached by anyone who could breach it, with 2016 monthly output reaching 33.64 million bpd in October.
Fitch believes that there is still substantial risk of OPEC members continuing to pump more than their new quotas, despite the establishment of a special monitoring committee that should supervise the implementation of the much-hyped agreement.
There is also uncertainty about non-OPEC producers’ contributions. Russia has declared its support for the agreement, pledging a gradual reduction in output of 300,000 bpd starting from January. But, says Fitch, it can always go back on its word, and the 300,000 barrel per day cut may very well be a cut off its planned 2017 production figures, rather than its October production.
What’s more, even if everyone sticks to their end of the bargain, the rating agency is pessimistic about some producers’ chances of propping up their budgets. Oil exporters from the Middle East and North Africa need much higher oil prices to plug their budget holes—which are now more like craters than holes—and the likelihood of such a substantial price increase is questionable. On top of that, the MENA area has undertaken only limited fiscal reforms, and still faces political risks, according to Fitch.
On this basis, Fitch set the economic outlook of MENA to Negative, with growth in oil-exporting Gulf countries generally “being subdued, as governments rationalize their spending in an environment of still-low oil prices.”
This sober take on the OPEC deal is based on the fact that the price recovery will be slower than previously expected, Fitch also said, and this will prevent the agreement from having any palpable effect on oil exporters’ economies.
On the plus side, although Fitch isn’t banking on $60 Brent in 2017, it also doesn’t see much downward pressure for prices at the moment, either.
At the time of writing of this article, prices were climbing again, with WTI trading up 2.87% at US$50.86 per barrel, and Brent crude trading up 2.82% at US$53.30 a barrel.
By Irina Slav for Oilprice.com
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