Russia’s Mineral Resources Minister, Sergei Donskoi, has demonstrated strong optimism about the direction oil prices are going this year and next. He believes that Brent crude could reach US$65 a barrel by the end of next year thanks to the OPEC-non-OPEC production cut agreement that, according to Donskoi, will remove excessive supply from the market, helped by growing demand.
Donskoi’s remark is very well timed: both Brent and WTI are sliding slowly but surely down, after the international benchmark jumped over the US$55 barrier but was unable to stay there. Many analysts believe the price rally that resulted from the agreement struck by OPEC and 11 non-OPEC producers including Russia is losing steam as shale producers in the U.S. ramp up production and worries grow that some of the parties to the cut deal will cheat.
Yesterday’s announcement from Riyadh that Saudi Arabia has cut more than its 486,000 bpd quota under the agreement provided a bit of support for prices, but it is unlikely to last unless some evidence emerges that this is in fact the case. After all, the oil market has been excessively volatile since 2014, with prices jumping and falling substantially on mere rumors.
It is likely that the Russian Minister’s comments aim to lend some further support to prices in hopes of reversing the overwhelming bullish sentiment of investors. The explanation Donskoi gives sounds reasonable enough, except it does not take into account, first, the output expansion plans of shale players, and second, the allure of higher prices that could make more than one OPEC member go back on their word regarding the production cut.
Even so, the possibility of crude oil rising over US$60 may not be so far-fetched given the timeline suggested by Donskoi. Most authorities seem to agree that 2017 won’t see any major improvements in the price of oil. Yet the surplus will start melting at some point, unless, of course, everyone cheats and starts pumping at the top of their capacity. And here’s the twist: this is unlikely to happen. Related: The Top 5 Places To Work In U.S. Oil And Gas
According to at least one energy analyst, industry vet Arthur Berman, the real reason for the OPEC deal was not so much tackling the glut as concealing the fact that some producers are nearing the limit of their commercially viable oil reserves. The reason: they pumped and pumped and pumped while oil flew high, and one of the characteristic features of hydrocarbons is that they are not renewable.
This rate of production, Berman argues, coupled with the shale revolution, led to the accumulation of massive inventories that will take time to be swallowed by the market. When this happens, oil prices will be able to sustain a rally for longer than a few days. It won’t happen, however, until crude oil inventories across the OECD fall by around 400 million barrels to their five-year average, Berman says.
The good news is that if everyone plays by the newly agreed rules, this could happen sooner rather than later. It all depends on how much producers rely on oil revenues and how fast they can diversify to reduce their reliance on a finite resource.
By Irina Slav for Oilprice.com
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