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Will The UAE Further Boost Its OPEC Compliance?

The United Arab Emirates have…

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‘’Oil Market Rebalancing Hasn’t Even Started Yet’’

OPEC’s compliance rate fell significantly…

Oil Below $65 Per Barrel…For Years

Oil Barrels

Recognizing that something had to be done to halt the latest crash in oil prices, Saudi Arabia’s energy minister went public with his support not only for an extension of the OPEC cuts for another six months, but he also dangled the possibility of an extension into next year.

Based on consultations that I've had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond,” Khalid al-Falih said during an industry event in Kuala Lumpur, according to Reuters. At the same time he waived away the signs that the market is still woefully oversupplied, acknowledging the larger-than-expected rebound in U.S. shale, but still noting that the fundamentals are improving. "I believe the worst is now behind us with multiple leading indicators showing that supply-demand balances are in deficit and the market is moving towards rebalancing," he said.

Up until now the decision was whether or not to extend for six months. Now, with a six-month extension looking assured, there are questions about whether even that will be enough. The oil markets no longer appear to be impressed by a six-month extension, judging by the increasingly languid price responses that have come after OPEC comments in recent weeks. OPEC was very successful at talking up oil prices last year, but the rhetorical power of al-Falih is on the wane.

With the six-month extension now baked in, OPEC is growing concerned that inventories might still be elevated by the end of the year. As a result, OPEC is starting to look at a nine-month extension, according to Reuters. “To increase production in those months may have a negative impact (on prices). So we may ask for an extension until the end of Q1 of 2018,” an OPEC source told Reuters. Related: Is The Market Ignoring OPEC?

However, the Saudi energy minister also cautioned that oil watchers are being myopic, becoming overly-focused on the near-term while neglecting the longer-term fundamentals. He argues that demand will continue to rise and the severe cutbacks in exploration over the last several years are sowing the seeds of a shortage by the end of the decade. The comments echo recent warnings from the IEA about the pending supply shortage because of a dearth of discoveries since 2015.

Conservative estimates predict that we will need to offset 20 million barrels per day in combined demand growth and natural decline over the next five years,” Falih said over the weekend. “That is why I fear...we are heading into a future of supply-demand imbalances.”

Many of the top energy analysts tend to agree with al-Falih’s near-term assessment – that the recent selloff might have gone a little too far due to some technical trading particulars rather than the reemergence of a supply glut. The oil market, however ploddingly, continues to adjust towards some sort of balance.

But even as he agrees with al-Falih’s characterization of what’s taking place right now, Ed Morse of Citi disagrees very much with the minister’s medium-term assessment. That is, Morse argues there will not be a supply shortage at the end of the decade. Related: Saudis Set To Cut June Crude Oil Exports To Asian Markets

In an FT column, Morse lays out his case, arguing that U.S. shale will add new sources of supply; other sources of supply will come from Russia, OPEC and other non-OPEC countries; demand is softening because of improved efficiency; and even oil sands and deepwater drilling have become cheaper by some 20 to 30 percent. Morse also said that natural depletion is not as much of a concern as many think, arguing that only 40 million barrels per day of non-OPEC production – rather than all of the world’s 100 mb/d – is of real concern for natural decline. That means that “only some 10 mb/d of oil requires replacement over five years and technology and capital efficiency put that easily within reach,” Morse wrote in the FT.

Ultimately, Citi does not foresee the price spike towards the end of the decade and into the 2020s that the IEA has warned about. The industry has structurally reduced costs and can grow production even with oil trading at today’s prices. That could ultimately mean that prices never go back to $100 per barrel.

Volatility could pick up, especially in the short run, but Citi is projecting oil prices to trade within the $40 to $65 per barrel range over the next five years.

By Nick Cunningham of Oilprice.com

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  • Douglas Houck on May 09 2017 said:
    Good to see that nobody knows what is going to happen in either the short, mid or long term with both oil supply and prices. Will be fun to watch.
  • Al on May 10 2017 said:
    There's a decent chance that crude will be above $65 before the end of the year, and possibly a lot higher. There's an oil shock coming sooner or later due to geopolitical problems in the middle east. Hard to believe that any analyst would make that claim going out 5 years with a straight face.
  • Brian on May 10 2017 said:
    MAY 10, 2017 Flows of gasoline and diesel into the Midwest fall as demand flattens and production grows

    Over the past 10 years, increased refining activity and relatively flat demand in the Midwest—Petroleum Administration for Defense District 2 (PADD 2)—have allowed refiners in the region to meet a larger share of regional gasoline and diesel fuel needs.

    www.eia.gov/todayinenergy/detail.php?id=31152
  • Brian on May 10 2017 said:
    This happened back on April 29, 2015 Energy superpower ‘Saudi America’ has been the world’s largest petroleum producer for 26 months in a row

    For the 26th month in a row starting in November 2012, “Saudi America” took the top spot again last December as the No. 1 petroleum producer in the world. Also, for the 26th straight month, total petroleum production (crude oil and other petroleum products like natural gas plant liquids, lease condensate, and refined petroleum products) in the US during the month of December at 14.83 million barrels per day (red line in chart) exceeded petroleum production in No. 2 Saudi Arabia (11.52 million barrels per day, see red line in chart).
  • david on May 16 2017 said:
    This is when you make money in this industry. I remember when it was $90.00 a bbl, and Boone Pickens was on TV one morning telling the world oil's new normal is $80.00 to $90.00 a bbl, I about fell out of my chair and said "brace yourself for the fall." Now to see headlines like below $50.00 or below $65.00 for many years...sounds like the new normal...this is good news...

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