Any detailed attempt to forecast oil prices is risky and even rash. On the other hand it can be instructive to attempt to identify the underlying forces that hold the greatest influence over those prices.
With that in mind we asked a panel of experts on three continents this question: “Beyond the planned Opec output cuts, what might be the main driver of oil prices for the rest of 2017?”
Their answers cover a range of variables, from a slump in global oil demand to US shale productivity gains to more efficient Saudi energy usage to Donald Trump. And in the end, it’s hard to factor out Opec …
Robin Mills in Dubai writes:
The current oil price slump is distinct from the last two in being driven by supply rather than demand. In 2008-09, a global financial crisis took prices below US$35 per barrel. In 1997-98, the Asian crisis caused prices to fall to $10 per barrel.
Much attention has been given to this year’s supply outlook and the competing trends of Opec restraint and US shale rebound. There has been less focus on demand, which was reasonably strong last year, rising by 1.4 million barrels per day.
Half of this year’s demand growth forecast by the US Energy Information Administration (EIA), 1.6 million bpd, is expected to come from China, India and the Middle East and another 16 per cent from the US. This assumes global growth accelerates from 2.2 to 2.7 per cent. Oil demand is expected to rise more quickly even though prices are up by 25 per cent from last year’s average.
But a general worldwide slowdown, a hard landing in China, Middle East struggles with low oil prices, the fallout from prime minister’s Narendra Modi’s “demonetisation”, or a generalised Trump-led trade war, all threaten this optimistic picture. It would not take an economic crisis but just weak growth, to delay market rebalancing and extend weak prices for another year.
Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis
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Steven Kopits in America writes:
Four factors could drive oil prices in 2017.
The first of these is unexpected productivity gains from US shale oil. Since October, the EIA has revised US oil production up by 460,000 bpd, suggesting that shale operators might have been holding some production in reserve, either in the form of drilled but uncompleted wells or of producing wells that had been choked back. In addition, the US oil rig count jumped by a whopping 29 in the week ending January 20, albeit after three lacklustre weeks preceding. It then added another 18 in the week to January 27. If horizontal oil rig count gains exceed six per week and production gains remain strong, Opec might lose confidence in its production cut plan.
Second, Republicans loathe the Iran deal. The Trump administration may well seek to crack down on Iran, potentially including renewed sanctions on Iranian oil exports. Iran’s inflammatory rhetoric is entirely unhelpful. Tehran believes tough talk shows its resolve. Instead, it will have the effect of waving the red cape in front of a bull. Look for trouble here, but it’s too early to predict the effect on oil markets.
Third, the election of Mr Trump to the US presidency shows both the ascendancies of populist nationalism and the recovery of “animal spirits”. With consumer and business confidence at multiyear highs, oil demand growth – both in the US and abroad – may well exceed expectations.
On the other hand, as Robin Mills points out above, Mr Trump’s protectionist tendencies could take a huge bite out of global trade, leading to weaker economic performance across the globe, if not worse. Such initiatives could harm GDP growth, the free flow of oil and with it oil demand growth. It’s early days in the Trump administration, but US policy is now the big macroeconomic wild card.
Steven Kopits is managing director of Princeton Energy Advisors in New Jersey
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John Sfakianakis in Riyadh writes:
Saudi Arabia’s oil minister, Khalid Al Falih, recently said that it may not be necessary to extend the deal reached by Opec and some non-member nations beyond its initial six-month period. However, it might be too soon to tell. There is no doubt that Saudi Arabia by November was getting enough data points that compelled its decision- makers to push ahead with substantial Opec cuts. Saudi crude oil exports hit a 13-year high in November, as Opec met to agree output cuts. Saudi Arabia reached a 35-year high in total oil exports last November. Had the kingdom continued with its exports, December would have been another record month, increasing the supply of crude oil.
Why did Saudi Arabia suddenly have more oil?
One big factor was a huge drop in the amount of oil the country needs to burn to generate electricity. The punishing Saudi summers boost demand for electricity – mostly to run air conditioners – to a level that previously required vast amounts of oil-fired generating capacity to be brought into use. The direct burning of crude oil in power stations would roughly double to about 900,000 bpd at the height of the season. Saudi oil usage has dropped as natural gas replaces about a third of what it uses for power generation.
But that changed last year. The start-up of the Wasit gas plant allowed the kingdom to slash the use of crude in power generation by as much as a third – freeing that oil up for export. In addition, the kingdom cut fuel subsidies, pushing down oil consumption by 2 per cent year-on-year in the first 11 months of 2016. Domestic oil consumption is set to decline this year again given that petrol prices will be lifted later this year.
Less consumption will leave Saudi Arabia with a lot more oil. Unless it cut output, it would have started flooding the market during the first half of this year. It might be difficult to tell right now if the kingdom will be ready to extend the deal beyond the first six months, but some data is pointing to a necessity to keep supply under a close watch.
John Sfakianakis is the director of economic research at the Gulf Research Centre in Riyadh
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Ramzi Salman in Dublin writes:
It is essential, for the success of the Opec freeze or any other production management system, to set a price ceiling below what would allow the return to the market of the supplies that caused the glut and price collapse.
Now that Opec and some non-Opec producers have agreed on reducing oil supplies, the price issue remains uncovered and a difficult hurdle.
Despite the many ministerial statements mentioning fair, desired, required and expected prices, there is no agreement yet on a price level, whether for preventing unwanted supplies or for triggering a review of participants’ production levels.
Let us assume that the production level commitments made by the producers, mostly with high revenue needs, will be, contrary to historical behaviour, honoured and a state of a balanced market achieved. In that case demand growth will, no doubt, give support to higher prices. How high do we want prices to go before we review and adjust production levels?
Admittedly setting a trigger price or a ceiling will not be a simple task. It has to, besides keeping targeted supplies out of the market, be rewarding to encourage investment in additional conventional production capacities, to meet future demand and avoid another cycle of high prices followed by collapse.
It is to be noted that, since the start of the relatively weak price recovery, there has been gradual reactivation of some mothballed production facilities as well as increased rig activity, especially in North America.
Since crude oil prices returned to above $50 per barrel, US drillers have added 235 oil rigs. Almost two-thirds of the rigs added were in the Permian Basin, the home of the US’s biggest shale oil-producing formations. Additionally, possible US tax reforms to support national oil production by taxing oil imports could give West Texas Intermediate crude a premium over Brent – perhaps as high as $10 per barrel compared with the $3 per barrel discount at present. This will, no doubt, give a boost to the US production of all types of oil and alternatives. Based on the above, I feel that the production level of shale oil and other non-conventional oils will be the main driver of oil prices for the rest of this year. That is unless there is full adherence to what was agreed among the 24 producers and a price target or ceiling is set by them as soon as possible.
Ramzi Salman was an adviser to Qatar’s minister of energy and industry. He has also been deputy secretary general of Opec and chief executive of Iraq’s State Oil Marketing Organisation
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Jim Crawford in Sharjah writes:
Probably the biggest threat to oil prices other than Opec is US energy policy.
It is clear that the Trump administration is going to impose oil import taxes or possibly even a quota on imports. Such action would affect all crude imports, not just Mexican supplies, which are threatened with a 25 per cent tax to pay for the immigration wall along the border. Import taxes will raise US prices while putting downwards pressure on international oil prices. Moreover, higher American domestic levels will accelerate the rebound of US shale oil, cancelling a larger portion of the Opec and non-Opec production cuts.
As Ramzi Salman mentioned, WTI could start trading at a strong premium to Brent – with some estimates putting the premium at as much as 25 per cent. Hedge funds are already increasing significantly their long positions in West Texas futures on rumours of impending action by Mr Trump.
Jim Crawford is the managing director of Sharjah-based Inter Emirates General Trading Company and a former petroleum investment banker in Canada
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Michal Meidan in Beijing writes:
2017 is an important year in China, with a leadership transition looming. In the autumn, five out of seven of China’s top party leaders are set to retire. Why is this important for the oil market?
Because in a year of political transition, the Chinese leadership cannot allow for anything to go wrong and they will seek to maintain economic growth at above 6.5 per cent. Beijing will do so through infrastructure spending and support for the real estate sector, combined with subsidies for consumers.
This is a sharp reversal from the past few years, during which the Chinese economy started shifting away from infrastructure and export-led growth, which are key drivers of diesel demand, towards a more consumption-led development path – leading to stronger demand for light ends such as gasoline and petchems.
So the need for stability and growth suggest that diesel, the part of the barrel that has fallen out of favour in China, will stage a comeback in 2017. Petrol demand from strong car sales, and petchems from rising demand for consumer goods, will remain strong too, even if this means sacrificing efficiency gains for a year. And with Chinese domestic oil production falling, strong product demand and continuing efforts to fill up the strategic reserves, China will emerge once again as a bright spot for crude and product demand.
Michal Meidan is Asia analyst at Energy Aspects
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Anthony McAuley in Abu Dhabi writes:
Venezuela is often discounted in the discussions of the broader oil market, although it still ranks as one of the top 10 exporters in the world. It had been a key plank in the US strategy of the 1990s to focus on regional sources of crude for imports and under Rafael Caldera – and particularly, with Luis Giusti in charge of the state oil company, Petróleos de Venezuela (PDVSA) – the country was happy to oblige and captured significant market share from Middle East suppliers.
Now the country’s output is at its lowest in more than a decade and about one-third below the 3 million bpd day it was producing in 2009. US imports of Venezuelan crude, at less than 800,000 bpd, are half of what they were five years ago. PDVSA is struggling to find the money even to pay for the tankers to export its oil and has been working out payment terms with the few development partners it has left, such as India’s ONGC Videsh, with most foreign oil companies having been alienated under the regimes of presidents Hugo Chavez and Nicolas Maduro.
A key question for the oil world is whether this will get worse before it gets better. There is no reason for optimism.
Anthony McAuley is a senior business reporter at The National who specialises in energy
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Jamie Webster in America writes:
In a year where numerous issues and data points will be important for oil markets, significant uncertainty surrounds the issue of the accumulated global crude and product storage. Stocks are up by more than 1.3 billion barrels since the oversupply began in 2014.
Of critical importance to the oil market is what is the new “normal” for oil stocks? Line fill, strategic stocks, working inventory for new or expanded refinery capacity have all boosted this number at the same time stocks grew. As the oversupply slows – as it has for some enclaves and fuels – and stocks begin to recede, the level and pace of working off the oversupply is key. This is particularly true as storage is unlikely to return to its past role on the margins but will be a key link in helping manage supply and demand in a much larger way than in the past.
Jamie Webster is a fellow at the Columbia Centre for Global Energy Policy in New York.
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