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DEMAND GROWTH SEEN UP

The next few weeks will be crucial in determining
if the production cuts are being implemented.

Oil market could move into deficit in early 2017: IEA

PARIS, December 14, 2016

If Opec sticks to its production target, assessed at 32.7 million barrels per day (mbpd), and non-Opec producers deliver the agreed cuts of 558,000 barrels per day outlined on December 10, then the market is likely to move into deficit in the first half of 2017 by an estimated 0.6 mbpd, said the IEA in a new report.

The final report of 2016 of the International Energy Agency (IEA) analyses events as dramatic as those that kicked off the year. The focus in January was on $30 per barrel (/bbl) oil and the imminent increase in Iranian oil production after sanctions were lifted.

“In December, we are seeing the first proposed output cut by Opec since 2008 – and the first deal including non-Opec producers since 2001 – which marks a major departure from the market share policy followed for the past two years,” the report said.

Opec’s cut to crude production of 1.2 mbpd almost matches its deliberate production increase of 1.3 mbpd in the twelve months to October (the month on which the Opec cuts are based), while the non-Opec group has seen its crude output fall in the same period by about 0.9 mbpd.

Meanwhile, following revisions to Chinese and Russian data, IEA has raised its 2016 global net demand growth number to 1.4 mbpd and that for 2017 to 1.3 mbpd.

Before the agreement among producers, our demand and supply numbers suggested that the market would re-balance by the end of 2017. But Opec, Russia and other producers are looking to speed up the process.

Oil market demand/supply balance to 2Q17

After the first half of 2017, the analysis is complicated by the fact that the proposed cut is for six months, and will be reviewed at the next Opec ministerial meeting at the end of May. This can be seen as prudent given the underlying uncertainties in the oil market and the global economy but also a warning that production restraint might not be extended.

The price curve reflects this with a sharp increase in short-term prices but shows relatively little movement further out. Opec also appears to be signalling that high-cost producers should not take for granted that they will receive a free ride to higher production.

These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments.

Clearly, the next few weeks will be crucial in determining if the production cuts are being implemented and whether the recent increase in oil prices will last. For contractual and logistical reasons, initially the output cuts may not fall neatly into place.

“The deal is for six months and we should allow time for it to be implemented before re-assessing our market outlook. Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices,” the IEA report noted. – TradeArabia News Service




Tags: Opec | IEA | oil market |

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