This year has been tumultuous for oil. From the US$27 a barrel trough we witnessed in February to the spike to US$55 after OPEC announced a labored deal to reduce production at the end of last month, it's been a crazy ride.
By all means, the OPEC deal, followed by a supplementary one with 11 external producers, was the event of the year in oil. The deals were the first concerted effort at restoring the balance between supply and demand on global markets since 2008.
Unfortunately, the enthusiasm it was met with proved to be short-lived for a number of reasons, among them the historical precedence of cheating among OPEC members when it comes to cutting production, the exemption of some of the cartel's biggest producers from the deal, and the unwillingness of some big non-OPEC producers such as Brazil to partake in the cut.
It's against this background that the Energy Information Administration (EIA) has released its latest, and last for the year, Short-Term Energy Outlook, which, combined with analyst forecasts, paints a not-too-bright picture for oil's immediate future.
1. Fundamentals.
Global production of crude, according to the EIA, will rise to 97.42 million bpd in 2017, versus consumption of 96.99 million bpd.
In other words, OPEC's deal is not going to restore balance because, the agency says, "The extent to which the announced plans will be carried out and actually reduce supply below levels that would have occurred in their absence remains uncertain."
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Moreover, even if all OPEC and non-OPEC members comply with their obligations under the agreement - unlikely, as we noted earlier - the U.S. shale operators are always ready to raise production as long as prices remain above US$50.
Already, the EIA has forecast that shale output in 2017 will decline by less than 100,000 bpd - a drop in the global sea of oil. And it might actually rise if prices remain at current levels. Related: Who Won The 2016 Oil War?
2. Prices.
Reflecting the bearish situation on the fundamentals front, prices, according to not just the EIA but a variety of analysts from institutions--including the World Bank, Goldman Sachs, Mitsui &Co, and Bank of America Merrill Lynch--Brent and WTI benchmark prices will most likely stay within the US$50-55 band.
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Headwinds are strong and upward potential remains weak, that's the short of it. Some, like BofA and JP Morgan are more upbeat, while Mitsui is more guarded in its predictions, as the chart below shows.
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Source: Bloomberg, Reuters, World Bank
Still, the oil market is so volatile that even these institutions, which we all quote when they update a forecast, are not sure what the next day will bring. Goldman, for one, changed its mind about oil prices twice within a week. This volatility will remain high in 2017, too, judging by the current situation on this market.
3. Investments.
Upstream spending on exploration in oil and gas is set to fall in 2017 to its lowest since 2005, according to Wood Mackenzie, to US$37 billion, from this year's US$40 billion. This would mark the third year in a row of declining expenditures on exploration.
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The good news: 2018 should see an uptick in exploration investments as 2017 will see this segment of upstream become profitable once again thanks to cost cuts. Related: Trump's Oil Price Dilemma
Overall capex in the energy industry, however, is set to increase in 2017, according to a BMI Research report from September.
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A recent Wood Mackenzie report is also optimistic on capex, with the analysts noting that the cost cuts implemented by the industry have brought down by half the cash-flow positive breakeven point. This means, that 2017 will be the first year since 2014 that will see many oil and gas players become cash flow positive.
All in all, there seems to be a consensus among analysts that 2016 saw the bottom of the depressed stage of the industry cycle and from now on things will start looking up, with the first marked improvements in performance to be noticed in 2018.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
Table 4a, of EIA Dec. '16 STEO you link, shows domestic production in "Lower 48 States (excl GOM)", a proxy for "shale production", as a projected 6.76 MM barrels for '16 and 6.49 MM for '17 (far right columns). This is a REDUCTION of 270k, not the 100k you reference in the article.
The quarterly progression in that row is fascinating, especially in light of rig count data... From May 27 to Dec. 16 we have added 194 oil rigs, yet the shale production has DECREASED from 6.78 MM in Q2 '16 to 6.65 in Q3 to 6.54 Q4, and est. further declines to Q2 '17. Appears shale "spigot" is challenged filling own depletion rate, so how will it fill in for OPEC in 1H '17?