03 December 2016
A deal to cut production, the first in eight years, notwithstanding; oil prices may not surpass $60 a barrel for the next five years as the Organisation of Petroleum Exporting Countries (Opec) is “not a game changer”, according to the Institute of International Finance (IIF).

“Our first price forecast for 2018 is $54 per barrel, and we maintain that prices are unlikely to break $60 per barrel during the next five years,” Washington-based IIF said in response to the Opec’s recent decision to cut production by 1.2mn barrels per day (bpd).

Expecting global inventories to decline in 2017 by 1mn bpd, IIF said it has adjusted its price forecast for 2017 upwards to $52 from $49.

“The Opec agreement is not a game changer in the oil market, as US shale producers remain the marginal suppliers. However, downside risks to oil prices have been reduced as state oil producers have shown more willingness to adjust production if needed to protect revenues,” it said.

After weeks of hectic parleys, the Opec-countries had inked a pact on a cut in oil production to 32.5mn bpd in early 2017, from an estimated 33.6mn bpd in October 2016, following which oil prices rose more than 10% in the past two days to a spot price of over $54 for Brent crude.

The quick rise in prices is also reflective of the moves of Russia and a few other non-Opec countries to gradually reduce production by a combined 0.6mn bpd, half of which comes from Russian oil companies.

This brings the total agreed supply reduction to 1.1mn bpd in 2017 (slightly less than the expected global demand growth), it said, noting that Russian production spiked in October to 11.2mn bpd.

The announced reduction will thus only take production back to the 2016 annual average, and “we expect Russian production to stay at this level in 2017,” it said. IIF said it continues to see global demand growth of 1.2mn bpd over the next couple of years, with upside risk from a more powerful US stimulus, and downside risk primarily from higher uncertainty in Latin America.

Global inventories are still very high, and US inventories have edged upwards in recent weeks as production has increased after a decline since mid-year, it said, adding high inventories, US producers on standby and potential shifts in US energy policy act as “counterweights to whatever upwards price pressures the Opec agreement may create.”

Finding that while efforts are made to oversee actual production, implementation risks remain high, IIF said this is especially the case in Iraq, where the dire security and fiscal situation makes a large cut (5%) somewhat “suspicious”.

Libya and Nigeria are exempt from the agreement as their production is recovering from security related issues. Libyan production rose to 0.53mn bpd in October, doubling since August, but still only a third of the pre-civil war level. Nigerian production increased to 1.63mn bpd, which is still lower than the 2014 level of 1.93mn bpd.

“We expect a maximum combined increase in production from these two countries over the next six months to be 0.6mn bpd,” it said, adding this limits the overall average cut to 0.5mn bpd in 2017.

The Opec will reassess the situation in the second quarter of 2017, which could lead to renewed volatility in prices if the agreement is not sustained, according to IIF.

© Gulf Times 2016