The Phase of Unguaranteed Stability
After two years of fluctuating oil prices, the energy markets have regained a sense of equilibrium and are steadily settling concerns about a growing supply glut.
Towards the end of 2016, oil prices got sustainably rebalanced primarily owing to the six-month agreement to cut production to almost 1.8 million barrels per day (bpd) from 1 January, 2017 by both OPEC and non-OPEC producers.
Most OPEC nations agreed to cut production by about 4.5%. Compliance of non-OPEC states, which accounts for a fifth of global oil production, is even more crucial in order to keep prices stable. At a meeting in Vienna on 10 December, twelve non-OPEC nations agreed to cut production by 558,000 bpd, wherein Russia will account for more than half the proposed cut.
According to the latest monthly figures released by OPEC, 890,200 bpd drop in production has been achieved as a result of agreed production cuts i.e. a compliance rate of 92%. Signs are encouraging with Kuwait slashing production by 130,000 bpd as agreed and Saudi Arabia cutting 70,000 barrels more than its agreed 490,000 barrels in January.
On the back of cuts, oil price forecasts for this year are considerably brighter, compared with the estimated $45 average for 2016. Analysts say the deal is going to set oil prices towards $70 by the second half of 2017.
UK bank Barclays predicted Brent to average $57 a barrel in the first quarter of 2017 and increase to $62 in the second quarter. Bank of America Merrill Lynch forecasts Brent will average $61 a barrel in 2017.
The period until the middle of this year will be crucial to watch if the situation develops favourably with the OPEC strategy. However, US output has already risen and higher oil prices may lead to a substantial ramp up in US shale production, posing threat to the OPEC deal. The Trump administration, in a move to end US dependence on OPEC, will explore the potential of its shale oil and gas reserves in a big way.
Although the general consensus is that the oil market will improve in 2017, but the degree to which prices will recover remains uncertain. On a side note, the current changing environment offers a perfect opportunity for the region’s oil companies to experiment and redefine their purpose.
If little recovery is felt, the Middle East producers must shift their focus to strategic and fundamental economic reforms and prepare for an indefinitely long period of relatively low oil prices.