Brent prices are likely to stay in the $50-55 range in the second half of 2017 and to average in the same range in 2018, said Barclays.
Despite the statements in the communiqué of the Opec/Non-Opec Joint Ministerial Monitoring Committee (JMMC) and Joint Technical Committee (JTC), balances still indicate a constructive market balance in the remainder of this year, it said.
The JMMC met in St. Petersburg for its fourth meeting on July 24 to review the June 2017 report as well as the first six months of the Declaration of Cooperation, as submitted by the Joint Opec-Non-Opec Technical Committee (JTC).
The Committee reviewed the JTC report and noted that the oil market is making steady and significant progress towards rebalancing. This assertion is based on the Report of the JTC for the month of June 2017, which reviewed market developments and the results of the first six months of progress made according to Opec’s 171st Ministerial Conference Decision and the respective voluntary adjustments in line with the Declaration of Cooperation.
“What has not changed is that Saudi Arabia and Russia are not wavering from their commitment to the deal. The ineffectiveness of the policy in the first half of 2016 means, in our view, that they will do whatever it takes to show an effect in the second half of this year,” Barclays noted, commenting on the communiqué issued by JMCC.
The JMMC made several noteworthy points in a press release. However, Barclays maintains that these are unlikely to make little difference to how the market already interprets the landscape for the balance of 2017 and 2018:
• Libya and Nigerian production upside capped: According to the press release, Libya and Nigeria acknowledged limited upside for production, yet market participants assign little likelihood that these countries are ready to participate in a broader Opec/non-Opec effort to balance the oil market. In other words, the damage has been done, and their current output level handicaps the efficacy of the Opec/Non-Opec deal.
• Oil fundamentals: Rebalancing is continuing and volatility has decreased. The release notes the likely increase in demand growth y/y from 0.9 in Q1, 1.5 in Q2 (IEA), and their expectation of 2.0 million barrels per day (mb/d) in the second half of 2017 (2H2017). This forecast of 1.6 mb/d of annual growth in 2017 exceeds our estimate of 1.4 mb/d.
• Conformity levels of 98 per cent: The release notes conformity with production quotas of about 98 per cent during 1H17. Our estimate for Opec’s 11 participating countries is about 96 per cent. We think this messaging is not incremental to the outlook for the balance of the year, as Iraq’s compliance continues to deteriorate.
• The OECD commercial inventory overhang is declining: Compared with the 5-year range, the overhang has decreased 90 mb, to 250 mb by June 2017. By our estimates, with preliminary IEA data through June, the surplus to the 5-year range is probably closer to 255-260 mb.
• Moderation in new FIDs threatening supply growth: Demand will eventually overtake supply growth. “We disagree that this is a relevant metric for the purposes of the supply deal, since it is too long term a dynamic and shale volumes are able to fill any void. In fact, we do not see the moderation in FIDs as threatening the health of the supply stack before 2020. We estimate roughly 8 mb/d of project volumes in 2020 that come from either already-sanctioned projects or projects completed and in the process of ramping,” Barclays said.
• Growth in US tight oil activity decelerating: The release highlighted “slowing well productivity, accelerating cost inflation, deceleration of rig count growth and constrained capital market access.” “Though we agree that these dynamics are occurring, this does not undermine the continued improvement in the viability of tight oil production,” Barclays noted.
• Recommendation to have an option to extend the cuts further. The JMMC noted that it “recommended keeping the extension…beyond 1Q18 as an option should further action be required for the stabilization of the market.”
• Acknowledgement that crude oil and product exports are undermining compliance. The JMMC has pledged that it will expand monitoring metrics outside of production to “other” metrics. This likely means watching export levels and oil product exports as a metric for compliance. As we noted upon the completion of the deal in December 2016, there are many ways that counterparties to the deal can undermine any crude production compliance level.
• Nigeria agrees to cap at about 1.8 mb/d. Nigeria voluntarily agreed to implement production adjustments as soon as its recovery reaches a sustainable production volume of 1.8 mb/d. There was a conspicuous absence of any statements of the same kind concerning the situations in Libya or from Venezuela.