Oil producers can relax for another 9 months—OPEC extended its production caps on Nov. 30—but as prices stabilize, oil producers and industry experts are looking ahead to the delicate process of unwinding quotas in 2018.
At OPEC’s meeting in Vienna, the cartel and an alliance of non-members kept quotas in place, strengthened monitoring and added a new provision that creates a “combined ‘cap’ of sorts on Libya and Nigeria” of 2.8 million barrels per day (MMbbl/d), Srdjan Demonjic, an analyst at KeyBank, told Hart Energy.
OPEC officials hadn’t yet made it clear if the cap was statutory or more of an assurance that production wouldn’t exceed 2017 levels, he said.
If OPEC’s oil demand growth forecast is on target, the cuts may not last much longer.
OPEC officials said any lifting of quotas would be gradual. An exit plan likely would not be considered until second-quarter 2018. OPEC might begin a tapering of production cuts in the third or fourth quarter of next year, Demonjic said.
“If OPEC demand projections come to fruition I do not see the cuts lasting through end-2018,” he said. “The Russians are keen to grow production capacity once again and OECD stocks should continue to draw at a healthy pace,” he said.
Harold Hamm, chairman and CEO of Continental Resources Inc. (NYSE: CLR), said in a Nov. 30 interview with Hart Energy that he was surprised that Libya and Nigeria were brought into the agreement. Their inclusion is meaningful since they unexpectedly added about 400,000 bbl/d to global supply this summer and “knocked the market down about 20%,” he said.
Overall, steps taken by OPEC and its non-member countries have helped drawdown inventories and help restore prices.
“It’s getting closer,” he said. “We’re seeing rebalancing occur. It’s just taking a little longer than we thought, although demand is good.”
Hamm said he wasn’t concerned about how OPEC would phase-out its production cuts. The organization is an old hand at such market adjustments.
“They’ve done these before, over and over, so that that shouldn’t be hard to do,” he said. “You don’t just turn it all back on at once.”
OPEC leaders also seem to understand U.S. shale producers in a way they did not in 2014. They’ve also recognized the “fear mongering”—namely that the U.S. would overrun the market with a flood of oil production.
“They’re less afraid of now of the U.S.,” he said, adding, “They’ve seen discipline over here that they recognize. I think they understand the market, more of how this works, and how the shareholders reward [the] companies they buy into.”
In particular, U.S. market is being shaped by new dynamics. In particular, “investors are demanding a return on capital employed, not just growth for growth’s sake and making sure everyone is going forward in a positive cash flow situation.”
Judith Dwarkin, chief economist for RS Energy Group, said demand growth and production cuts have moved Brent prices from the low $40s in June 2016 to the low $60s.
“Prices are now in a pretty comfortable spot for just about everybody,” she told Hart Energy in an email. “However, the market is still burdened with an overhang of the petroleum stocks that accumulated during the ‘experimental’ years 2015-2016.”
Extending the cuts was needed to prevent the overhang in inventories from getting bigger.
“Beyond next year, the question is how the deal will be ended to prevent a flood of oil from coming back onto the market,” she said. “Based on our outlook for the levels of non-OPEC production and global oil demand in the medium term, we suspect OPEC will need to keep trimming the sails to some extent if the objective is to keep prices stable.”
Demonjic cautioned that the outlook on prices isn’t dependent just on demand, but on compliance by OPEC, Russian and others.
OPEC’s most recent forecast, released in November, sees total global oil demand increasing by 1.51 MMbbl/d in 2018, with total projected demand edging up to 98.45 MMbbl/d.
In November, the International Energy Agency (EIA) estimated a slower 1.3 MMbbl/d rate of growth, but a higher overall demand of 98.9 MMbbl/d.
“As global stocks draw and an end to cuts are in sight, the temptation to cheat will be formidable,” he said.
OPEC’s next meeting is set for June in Vienna.
Darren Barbee can be reached at firstname.lastname@example.org.