Oil output cuts not enough to bring prices up, says expert
Oil output cuts will not be enough to bring prices to a high level, believes Arthur Berman, an independent US geological consultant.
He says a larger issue is the inexorable relationship between stocks and prices.
"In part, this week’s price downturn reflects waning confidence that OPEC production cuts will result in higher prices… There seems to be a growing awareness that global oil markets are incredibly complex, and that there are so many moving parts that a single, simple solution is unlikely," Berman, who has about 40 years of experience in petroleum exploration and production, told Trend by email March 14.
The expert says the industry for more than two years has believed that higher prices are possible without extreme reductions in inventories.
"Great expectations were placed in an OPEC production cut to rescue the industry from a weak oil market."
"The fallacy lies in thinking that the problem stems from a simple imbalance between production and consumption and is unrelated to a fragile and debt-dependent global economy. That hope was a dream. It appears that oil markets have woken up from that dream," Berman said.
He noted that the issue is not so much about this week’s change in inventory.
"It is about how much inventory needs to be reduced and how long that will take in the most hopeful scenario."
According to Berman, if OECD stocks must fall by approximately 550 million barrels to support $70 prices, it will take more than a year to get there if production is cut by 1 million barrels per day.
"If the production-consumption balance fluctuates, it will take even longer," he noted.
Noting that OPEC and non-OPEC comply with their oil output cut deal reached in late 2016, Berman said early evidence suggests the agreement has resulted in significant production cuts, nearly half of which are borne by Saudi Arabia.
The expert also said the EIA March Short Term Energy Outlook showed a 1 million per day world production minus consumption deficit, noting that one month does not prove a trend.
"For example, August 2016 showed a larger deficit only to be followed by several months of surplus," Berman said. "But it is a hopeful sign."
In December 2016, OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices.
Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 bpd starting from Jan. 1, 2017 for six months, extendable for another six months, to take into account prevailing market conditions and prospects.
OPEC agreed to slash the output by 1.2 million barrels per day from Jan. 1, with top exporter Saudi Arabia cutting as much as 486,000 bpd.
According to OPEC Monthly Oil Market Report, world’s oil supply decreased in February by 0.21 million barrels per day compared to January to average 95.88 million barrels per day. In November 2016, world’s oil supply was at 96.84 million barrels per day.
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