• 2 hours Bidding Action Heats Up In UK’s Continental Shelf
  • 7 hours Keystone Pipeline Restart Still Unknown
  • 11 hours UK Offers North Sea Oil Producers Tax Relief To Boost Investment
  • 13 hours Iraq Wants To Build Gas Pipeline To Kuwait In Blow To Shell
  • 15 hours Trader Trafigura Raises Share Of Oil Purchases From State Firms
  • 17 hours German Energy Group Uniper Rejects $9B Finnish Takeover Bid
  • 18 hours Total Could Lose Big If It Pulls Out Of South Pars Deal
  • 20 hours Dakota Watchdog Warns It Could Revoke Keystone XL Approval
  • 2 days Oil Prices Rise After API Reports Major Crude Draw
  • 2 days Citgo President And 5 VPs Arrested On Embezzlement Charges
  • 2 days Gazprom Speaks Out Against OPEC Production Cut Extension
  • 2 days Statoil Looks To Lighter Oil To Boost Profitability
  • 2 days Oil Billionaire Becomes Wind Energy’s Top Influencer
  • 2 days Transneft Warns Urals Oil Quality Reaching Critical Levels
  • 2 days Whitefish Energy Suspends Work In Puerto Rico
  • 2 days U.S. Authorities Arrest Two On Major Energy Corruption Scheme
  • 2 days Thanksgiving Gas Prices At 3-Year High
  • 2 days Iraq’s Giant Majnoon Oilfield Attracts Attention Of Supermajors
  • 3 days South Iraq Oil Exports Close To Record High To Offset Kirkuk Drop
  • 3 days Iraqi Forces Find Mass Graves In Oil Wells Near Kirkuk
  • 3 days Chevron Joint Venture Signs $1.7B Oil, Gas Deal In Nigeria
  • 3 days Iraq Steps In To Offset Falling Venezuela Oil Production
  • 3 days ConocoPhillips Sets Price Ceiling For New Projects
  • 5 days Shell Oil Trading Head Steps Down After 29 Years
  • 5 days Higher Oil Prices Reduce North American Oil Bankruptcies
  • 6 days Statoil To Boost Exploration Drilling Offshore Norway In 2018
  • 6 days $1.6 Billion Canadian-US Hydropower Project Approved
  • 6 days Venezuela Officially In Default
  • 6 days Iran Prepares To Export LNG To Boost Trade Relations
  • 6 days Keystone Pipeline Leaks 5,000 Barrels Into Farmland
  • 6 days Saudi Oil Minister: Markets Will Not Rebalance By March
  • 6 days Obscure Dutch Firm Wins Venezuelan Oil Block As Debt Tensions Mount
  • 6 days Rosneft Announces Completion Of World’s Longest Well
  • 7 days Ecuador Won’t Ask Exemption From OPEC Oil Production Cuts
  • 7 days Norway’s $1 Trillion Wealth Fund Proposes To Ditch Oil Stocks
  • 7 days Ecuador Seeks To Clear Schlumberger Debt By End-November
  • 7 days Santos Admits It Rejected $7.2B Takeover Bid
  • 7 days U.S. Senate Panel Votes To Open Alaskan Refuge To Drilling
  • 7 days Africa’s Richest Woman Fired From Sonangol
  • 8 days Oil And Gas M&A Deal Appetite Highest Since 2013
Alt Text

Oil Survives Bearish Backlash

Crude benchmarks posted steep losses…

Alt Text

The Undisputed Leader Of Tomorrow’s Oil & Gas Markets

According to the Executive Director…

Alt Text

The Surprise Winners Of The Oil Price Rally

The recent rally in oil…

Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

More Info

Is Aramco IPO Behind Saudi Eagerness For OPEC Cut Extension?

Aramco

Clear signs emerged this week that the OPEC production cuts in place since November 2016 may be extended past their June 2017 deadline. On Tuesday, Saudi Arabia expressed their willingness to extend the cuts, and the OPEC monthly production report showed the Saudis continuing their over-compliance, cutting production to 9.9 million bpd in March, around 100,000 bpd below the agreed-upon monthly quota.

The total fall in OPEC production was 365,000 bpd, sending total production down to 31.68 million bpd. Saudi over-compliance was one factor in the decline, but there were also involuntary losses in Libya and Nigeria. Along with Saudi Arabia, other OPEC members like Kuwait, Iraq, Algeria and Angola have all said that further cuts will be necessary to return markets to a state of balance.

The Middle Eastern producers have indicated that their ideal price target is $60, a level which they feel will allow their economies to recover without enabling further American production, according to the Wall Street Journal. Both the announcement of the Saudi position and the OPEC report helped keep prices buoyant this week, as the late-March rally continued, sending the WTI above $53 a barrel.

Research from the KLR Group released on Thursday indicated that global inventories would be normalized late in 2017 if the OPEC cuts were extended. A stabilizing supply-demand situation is also the outlook of the IEA, which predicted demand to decline for the second year in a row in 2017. Neither bearish nor bullish, the IEA outlook hedged on the side of caution, noting that declining inventories and OPEC cuts raising prices would spur new growth in U.S. production, partially offsetting the OPEC gains and repeating the trend of early 2017. In January, reports of huge inventory draws and a surge in shale activity saw the price fall back to its pre-November level. Related: Can Lenin Solve Ecuador's Oil Crisis?

Both KLR and the IEA believe that further OPEC cuts would tighten supply, leading to greater stock draws and higher prices in the second half of 2017. Further growth in U.S. production, which rose in the first three months of the year and will likely continue to do so as long as prices stay above $50, could offset the OPEC cuts. But perhaps not entirely, particularly if non-OPEC compliance rises further. Goldman Sachs predicts a return to pre-2003 price stability, with a $50 average.

That’s good news for oil bulls hoping for an extension in the current rally through the second quarter of 2017. A joint committee of OPEC and non-OPEC oil producers agreed to review a cut extension in early April, which boosted confidence that a deal to extend cuts was likely.

But not all OPEC producers are keen on the idea of further cuts. Iran, eager to boost production past its pre-sanctions level, only agreed to cuts in November on the condition it was permitted to continue increasing production to 3.8 million bpd. It reached that level in late 2016 and even neared 4 million bpd according to direct communication to OPEC, but there’s a good chance much of Iran’s impressive increase in exports since January 2016 came from storage facilities on and off shore, and that actual Iranian field production may decline without considerable investment. Iranian production declined somewhat in March, falling 28.7 thousand bpd to 3.79 million bpd according to secondary sources.

Iranian stubbornness and hard-bargaining last year was one of the principle obstacles to the production deal. An attempt to negotiate a cut extension may result in Saudi pressure on Iran to cut below 3.8 million bpd, a move that is sure to bring strong Iranian resistance. As the current Iranian government faces reelection in May, a move to cut production could be interpreted as a sign of weakness, particularly in a country where oil has long been a focus of national pride. Related: IEA: Oil Markets Are Balancing At A Rapid Pace

Iran may be the major stumbling block, as it looks like other major producers are all in favor of extending the cuts. Even Iraq has indicated that it thinks cuts are necessary to boost prices to $60. Other producers which have struggled with internal disruptions and major declines in production, including Venezuela, Nigeria and Libya, may opt for cuts as long as they are granted exemptions. Given Kuwaiti and Saudi eagerness to boost prices, there’s a chance that an amicable deal could be reached keeping the cuts in place while offering struggling producers the chance to recover some lost output.

The fact that higher prices boosts the potential value of Saudi Aramco, which faces its first IPO in 2018, shouldn’t be discounted either. The Saudi government has already cut taxes on Aramco from 85 percent to 50 percent, a move to make the company even more attractive to investors.

It’s likely that OPEC will continue to talk up the possibility of a cut extension to keep prices buoyant. Markets and analysts will have to wait and see how OPEC views the industry landscape when it meets in May. But the signs pointing towards an extension in the OPEC production cuts past June are becoming difficult to ignore, and that’s good news both for market bulls and U.S. shale producers.

By Gregory Brew for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Greg Joshner on April 17 2017 said:
    The Aramco IPO sure looks more and more like a last ditch effort to extract a lot of money before the oil party is over. If the Aramco reserves are factored at a whopping $75 per barrel, I could totally see why they need to get the oil price high just ahead of the IPO.

    I have no doubts that the wheels will fall off as soon as the IPO is over: there is no sign of the oil glut subsiding and with more and more countries transitioning through peak-oil demand, if you own oil reserves, you better sell them at any price as long as you (economically) can.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News