The debate around energy markets at the Global Commodity Outlook Conference in Dubai last month unsurprisingly focussed on the current OPEC / non-OPEC deal for production cuts, and whether or not this could continue to hold if oil prices edge up above $70 per barrel.
The deal, between members of OPEC (the Organisation of Petroleum Exporting Countries) and a group of other hydrocarbon exporters led by Russia, has been in place since early 2017 and an extension agreed late last year should take it up until the end of 2018.
The producers agreed to cuts that removed 1.8 million barrels per day from the market with a view to rebalancing prices and removing an overhang of supply to the market. Brent crude prices had fallen to below $29 per barrel in January last year and, since the agreement, had crept up to more than $66 per barrel on Wednesday.
However, Esa Ramasamy, a global director of business development at S&P Global Platts, argued that, if prices climb above $70 per barrel, it could be difficult to ensure all of the partners continue to comply with the cuts.
“The whole idea about OPEC instituting cuts is to enhance market value for their crudes,” Ramasamy said.
“At $70, everybody is going to be tempted to move away from their obligations. I don't want to say cheat - nobody is cheating yet. It's all about their own national interests and their compliance levels. Which I think, at $70, is going to be hard-pressed and tested very strongly.”
Matt Stanley, a commodities broker at UAE-based Freight Investor Services, is less confident of continued price rises because he believes the inventory being removed by OPEC and its partners is being added back by increased U.S. shale oil production.
"As soon as OPEC cut, the U.S. jumped on the bandwagon straight away and have started to produce more than effectively the cuts have taken off the market," he said.
He argued that the spot price for Brent crude is likely to move back downwards towards $50 per barrel and that the group that has agreed production cuts may not be able to agree on any deeper cuts.
"I think they've played their trump card already," said Stanley.
Edward Bell, commodities analyst at Dubai-based bank Emirates NBD, said: “I think that OPEC is going to maintain the current production agreement that they have in place, but I would expect to see in practice some deterioration of that on the sidelines,” Bell said.
"There is some room to accommodate extra barrels through the deterioration we're seeing in places like Venezuela, but even so, we're talking about 1.2 million barrels from OPEC producers alone and another 500,000-600,000 from some of the partners on board with the deal. That oil is going to come back on the market at some point. Is it going to be able to come back on the market when we still have potentially over 1m barrels per day of non-OPEC supply growth in 2019-20? Is there a scenario we can draw out where demand is big enough to accommodate that? I think that's really unlikely.”
Mike Davis, a London-based director of oil market development at ICE Futures Europe, was more upbeat about the demand for crude, stating that the past few years of low oil prices had removed a lot of exploration and production capacity from the market.
“The market as a whole has absorbed a lot of this tremendous overhang of oversupply which we had, but $400 billion of capex has effectively gone west and I think the market has tightened, and it may continue to tighten some more.”
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(Reporting by Michael Fahy; Editing by Shane McGinley)
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