In Oil & Companies News 04/10/2016
OPEC’s move to cut output might be too late.
After pumping full tilt for the past two years, the Organization of the Petroleum Exporting Countries is weighing a plan to reduce production by up to 700,000 barrels a day later this year. But many analysts say the proposed reduction isn’t big enough, nor will it happen quickly enough, to address a global supply glut that has kept oil prices low.
Going into this year, many forecasters projected that supply and demand for crude would return to balance by the end of 2016. But even after OPEC’s agreement, most now don’t see a rebalancing until the middle of next year, or even later. Global inventories are near record levels, and OPEC has been outflanked by shale producers that have weathered oil’s collapse and can boost output when prices rise.
“The fast and nimble U.S. drillers have taken away some of OPEC’s power,” said Daniel Yergin, vice chairman of IHS Markit and a longtime oil-market watcher. ”Now there’s a lot more oil that is not OPEC oil.”
OPEC reached a consensus on Wednesday to scale back production to between 32.5 million and 33 million barrels a day, down from 33.2 million barrels a day in August. The cartel said it would complete details at its November meeting.
News of the proposal caught the market by surprise, sending U.S. crude prices up 8% over the last three days of the week to $48.24. Prices are up 30% this year, after falling below $30 to a 13-year low early in the year.
It remains unclear which countries would cut and whose production numbers would be used as a reference point. OPEC members have a history of failing to comply with output quotas.
Even if OPEC ratifies and enforces the agreement, many energy experts say the production cuts could have a limited impact on correcting the global supply imbalance. The glut reflects in part the changing roles of U.S. producers and OPEC, as shale drillers have gained market share and more power to influence global prices.
“OPEC does not control marginal production and therefore has no lasting control over prices,” Commerzbank AG said in a research note on Thursday.
Countries outside of OPEC now account for 58% of the world’s total output, which in the second quarter ran at 95.9 million barrels a day, above estimated demand of 95.6 million barrels a day, according to the International Energy Agency.
OPEC’s proposed cuts would reduce the excess supply only if they weren’t offset by gains in non-OPEC output. Even if the cuts were to bring global production back into line with consumption, inventory levels around the globe would remain high.
In July, the most recent period for which data are available, stockpiles of crude oil and refined products held by countries in the Organization for Economic Cooperation and Development topped 3.1 billion barrels, up 15% from two years earlier, according to IEA data. Non-OECD stockpiles also stand near records, according to Bernstein Research estimates.
“At the end of the day, it just comes down to very, very basic fundamentals: how much oil do you have in the system?” said Joe Tanious, senior investment strategist at Bessemer Trust. “You want to see a drawdown of those inventories.”
Overall, non-OPEC production is expected to fall by more than 800,000 barrels a day this year, according to the IEA, but rise by nearly 400,000 barrels a day next year due to increased output from Canada, Russia and Brazil.
Some investors say the consensus is too bearish and think the glut will ease. They note that companies have cut hundreds of billions of dollars in spending on oil and natural-gas production since 2014, and that 2017 might mark the first-ever third straight year of declining energy spending, according to the IEA.
“Shale can turn on and off quickly, but the other 96% of the oil market cannot,” said Robin Wehbé, portfolio director at Boston Company Asset Management, a unit of Bank of New York Mellon Corp. He said that an “unprecedented starvation of capital for oil companies” would slow output and lift prices in the coming years.
But lower investment hasn’t translated into lower production as quickly as many expected. Projects that were started years ago are still coming on line. Bernstein Research released a list last week of 136 offshore projects still under construction, some of which aren’t expected to be complete until 2021.
Output that has been disrupted for political reasons or other factors is also coming back as well. Iran’s output in August was nearly 800,000 barrels a day above its average in 2015, when it was restricted by international sanctions, according to the IEA. That almost offsets a decline in U.S. output in the same period. Canadian production has rebounded following wildfires in May, and Nigeria and Libya could also increase production if unrest in those regions subsides.
On the demand side, consumption has recently disappointed. Oil demand is expected to grow by a robust 1.3 million barrels a day this year, according to the IEA, but demand growth plunged in the third quarter due to “a dramatic deceleration in China and India,” the agency said.
OPEC itself has contributed to the global glut by producing record levels of oil this summer.
“The market has changed since June, and our expectations about the rebalancing process have shifted,” OPEC President Mohammed bin Saleh al-Sada, who is Qatar’s oil minister, said Wednesday. “It is evident that there is now a greater degree of urgency about ensuring the market returns to balance as quickly as possible.”
Source: Wall Street Journal
