The agreement between OPEC and non-cartel oil producers to reduce supply would help draw down the huge global inventory build by the third quarter of this year, S&P Global Platts said in its Oil and Gas Outlook for 2017.
Like every expert and analyst out there, Platts also hinges its estimates on compliance to the deal and on the wildcards Libya and Nigeria, the two OPEC members exempt from cuts due to civil unrest and militant attacks, respectively.
“Just how fast the market rebalances will depend on the discipline to enforce and maintain the cuts across a disparate group of oil producers, especially with crisis-ravaged OPEC members Libya and Nigeria exempted from the agreement, but with the potential to see large additions in output,” Platts said.
Compliance to the OPEC/NOPEC deal to cut output would be critical in ensuring that the floor on oil prices holds, while the pace of the U.S. shale return would dictate how low the ceiling on oil prices could be, Paul Hickin, Oil Editorial Director at S&P Global Platts said.
According to Reuters market analyst John Kemp, Saudi Arabia and its Gulf Arab allies would start implementing their respective shares of cuts immediately. Other producers, both inside and outside the cartel, are expected to do their cuts gradually.
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The caveat is that the different timing in implementation of the cuts raises the prospect of non-compliance, again, according to Kemp. In addition, if producers see that the output-cut deal is working in lifting oil prices and eliminating the glut, some countries may not stick to all the cuts they have pledged, the analyst said.
Saudi Arabia has already shown signs it started the cuts, so have Kuwait, Oman, Venezuela and Iraq.
While OPEC would be the key to the oil price floor, the factor for the ceiling is the U.S. oil patch.
Platts Well Economics Analyzer has estimated that should WTI Crude price reach US$65 per barrel, the leading U.S. production areas would have 35-40 percent internal rate of return. Platts, like many others, sees the Permian Basin as the biggest potential beneficiary of double-digit rises in this year’s capital budgets.
Platts Analytics expects Permian output at 2.226 million bpd this year, up from just below 2 million bpd last year.
Platts also sees a rise in U.S. crude oil output and wider WTI/Brent spread as raising hopes that U.S. crude oil exports could increase a lot this year.
By Tsvetana Paraskova for Oilprice.com
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The other metric I fail to read mentioned is the 4000+ DUC’s, horizontally drilled but not completed, existing in the US production market. These wells are “simply waiting”, again, for the right time and the right price to come into production. All that would be required to bring the DUC’s on line would a $1.50-3.00 million fracking job and a distribution plan. The bulk of the DUC’s are in the Permian and Eagle Ford basins, the two most economical production fields in the US.
These two factors alone, added to the ones sited in your article all point in one direction. Oil prices will be depressed for a much longer time than projected. Even if the Arabs live by their production agreement, which based off their track record we shouldn’t wager on, there is more than enough oil in existence to keep prices depressed for many, many years to come.