By Sara Israfilbayova
The OPEC+ method of cutting production to lower inventories may not be the fastest way but it is probably the least-painful way from a price standpoint to balance the oil market, John Spears, President of Spears & Associates told Azernews.
Spears went on to say that the other method to balance the market would be for OPEC+ to increase its oil production and reduce oil prices to the marginal lifting cost (perhaps as low as $20/bbl) in order to shut-in high-cost oil fields and spur oil consumption.
“In the past oil prices have swung usually because oil demand and oil supply did not grow at the same rate. Most of the time oil demand tends to rise or fall smoothly from year to year. However, supply from new oil fields tends to come on stream irregularly and in big increments, like the Kashagan field, since most big oilfields traditionally take the better part of a decade to discover and bring on line. As a result of this supply-demand mismatch, the oil market has swung from undersupply to oversupply and prices have reacted accordingly,” the company’s President stressed.
Further touching upon the issue of the prolongation of the OPEC+ deal, Spears noted that the OPEC+ production cuts can only be effective in reducing global oil inventories if compliance with the agreement remains high.
“On this point, the high level of compliance with production cuts over the past year by the members to the agreement has led the market to expect that compliance will remain high going forward. However, we expect that the level of compliance will begin to slip as inventories near the level that OPEC+ is targeting,” the expert said.
Spears believes that the other two factors that will play an important role in determining if the production cuts are effective are the growth in global oil demand in 2018 and the level of oil production in the U.S.
“It appears that worldwide oil demand growth will remain strong (~1.7 million bpd) in 2018 as most of the global economy appears to be growing; this will help OPEC+ achieve its goal of reducing oil inventories. It seems unlikely that new countries will join the agreement going forward,” he explained.
Speaking of the U.S. oil producers, he mentioned that they are currently under increasing pressure from investors to improve their profitability.
“In order to stabilize the market, the U.S. oil producers and OPEC+ members will each have to reset their expectations. The U.S. oil producers will have to accept a lower growth rate for oil production than they might otherwise seek; in return, OPEC+ member countries will have to accept a lower oil price than they might otherwise desire,” the expert underlined.
Moreover, Spears believes that by the end of this year Brent prices will be around $70/bbl and WTI prices will be around $65/bbl.
“Once the OPEC+ agreement comes to an end we estimate that its members might be able to increase their collective output by about 500,000 bpd. In the context of a global oil market growing about 1.7 million bpd we do not expect an increase of 500,000 bpd from OPEC+ to push oil prices down in 2019,” Spears concluded.
As of January 11, U.S. West Texas Intermediate (WTI) crude futures were at $63.50 a barrel, 7 cents below their last settlement, but still close to a December-2014 high of $63.67 per barrel reached the previous day, while Brent crude futures were at $69.10 a barrel, 10 cents below their last finish.
In November 2016, the OPEC summit was held in Vienna, where OPEC members reached an agreement on reducing oil output by 1.2 million barrels per day. In December 2016 was a meeting of oil producers outside the OPEC. The meeting ended with signing an agreement to reduce oil production by a total of 558,000 barrels per day starting from January 2017.
OPEC and its partners decided to extend its production cuts till the end of 2018 in Vienna on November 30, as the oil cartel and its allies step up their attempt to end a three-year supply glut that has savaged crude prices and the global energy industry.
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