Oil-Related Developments - March 2017

Over the last month, oil prices initially stayed between $ 55-57 (Brent) and $ 51-53 (WTI). Prices went up to a high of $ 57.31 (Brent) / $ 54.40 (WTI), in response to news relating to effective compliance with production cuts by OPEC and non-OPEC members (90% compliance, the best in OPEC history) and possible extension of the production agreement beyond 30 June.

However, from 11 March, prices started coming down: they briefly touched $ 50.85 (Brent) on 13 March, before closing at $ 51.41 (Brent)/ $ 48.44 (WTI); prices have thus gone down over 8 percent since the decision to effect production cuts was announced in November last year.

These price declines are in response to reports that global inventories were higher than expected: there has been a surge in US inventories, which rose by 8.2 million barrels to a record 528.4 million barrels in the second week of March, the ninth continuous weekly rise.   This is 20 percent more than the average of last five years, and 30 percent compared with the 2010-14 period.  Other factors putting pressure on prices are high production levels in Nigeria and Libya, which are not included in the production cut agreement, and high stockpiles in China, reported to be 30 million barrels last month.

Besides high US stockpiles, there is news that more rigs for US shale oil production were being deployed in response to prices remaining above $ 50. US companies are said to have added 77 rigs this year to 24 February, reaching 617 rigs in place, the highest level since September 2016. US production is now forecast to reach 4.87 mbd in March, the highest level since May 2016. US shale producers are being described as “fitter, leaner and faster versions” as compared to the earlier companies, many of which closed when prices began to collapse in mid-2014, and are comfortable with prices above $ 50.

These developments have focused attention on whether the OPEC/ non-OPEC production cut would continue beyond June. The Saudi energy minister has said that OPEC would take a decision on this at its ministerial meeting in May based on production cut compliance and whether inventories had declined. As of now, some analysts are projecting prices in the range of $ 45-47 in coming months. This is expected to put pressure on producers to extend production cuts after the June deadline.

For the medium term, Merrill Lynch projected average prices of between $ 50-70 through to 2022, slightly below its earlier estimates of $ 55-75. The company also estimated that global oil consumption would expand at 1.1 mbd per annum, with demand driven mainly by emerging markets. In the period 2017-22, Merrill Lynch forecast non-OPEC production growth to be an average of 830,000 b/d annually, with 80% of the rise coming from the US.

 

March 19, 2017

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About the Author

Ambassador Talmiz Ahmed

Former Ambassador of India to Saudia Arabia, Oman and UAE, monitors developments in the West Asian region.  

Ambassador Talmiz Ahmad joined the Indian Foreign Service in 1974. Early in his career, he was posted in a number of West Asian countries such as Kuwait, Iraq and Yemen and later, between 1987 and 1990, he was Consul General in Jeddah. He also held positions in the Indian missions in New York, London and Pretoria. He served as Indian Ambassador to Saudi Arabia (2000-03; 2010-11); Oman (2003-04), and the UAE (2007-10). He was also Additional Secretary for International Cooperation in the Ministry of Petroleum and Natural Gas in 2004-06. In July 2011, the Saudi Government conferred on him the King Abdul Aziz Medal First Class for his contribution to the promotion of Indo – Saudi relations. After retirement from the Foreign Service in 2011, he worked in the corporate sector in Dubai for three years. He is now a full-time academic and holds the Ram Sathe Chair for International Studies, Symbiosis International University. He has published three books: Reform in the Arab World: External Influences and Regional Debates (2005), Children of Abraham at War: the Clash of Messianic Militarisms (2010), and The Islamist Challenge in West Asia: Doctrinal and Political Competitions after the Arab Spring (2013). He writes and lectures frequently on Political Islam, the politics and economics of West Asia and the Indian Ocean and energy security issues.