BULL-BEAR: Oil Prices Quarter 2/2017
|Crude oil price (USD/Barrel)||2016||2017F||2018F|
Source: EIC analysis based on data from leading international sources (as of April 3, 2017)
|EIC’s view: Bear
Crude oil prices will stay flat during the second quarter of 2017. While both OPEC and non-OPEC producers managed to cut production to a level close to their agreed target, the oil market still faces an excess supply of around 0.4 million barrels per day. Plus, U.S. oil producers are expected to pump more, as indicated in the recent surge in rig counts. Together, these factors will continue to suppress oil prices. However, we will closely monitor the OPEC meeting in May. If OPEC can prolong the agreement to cut production until the second half of 2017, oil prices might edge up.
• OPEC members are sticking to the group’s decision to reduce production, with a 93% compliance rate (compared to 60% in the past). In January and February 2017, OPEC’s production was down to 32 million barrels per day, a 3% drop from December last year. The decrease was led by Saudi Arabia, which needed to cut production by 0.5 million barrels per day, the largest amount among all members. The Saudis are now producing only 9.8 million barrels per day, below the agreed-upon level of 10.1 million barrels.
• Eleven non-OPEC producers have also cut production, with a compliance rate of 60%, higher than the expected rate of 40%. The supply reduction during the first half of the year amounted to 0.558 million barrels per day. Russia, which faced the largest cut of 0.3 million barrels per day, reduced production by 0.117 million barrels per day in January 2017. The Russians are expected to gradually cut production further in the coming months.
• Political tensions in Libya held its oil production back by 0.1 million barrels per day, down to 0.6 million. This led to a fall in oil exports from the ports at Es Sider and Ras Lanuf. If tensions between the Libya’s eastern and western regions continue, its oil supply will shrink.
• A crude supply excess of of 0.4 million barrels per day is expected during the second quarter of 2017, keeping prices low. The Energy Information Administration (EIA) forecasts that global supply will rise in the second quarter, reaching 97.95 million barrels per day, while demand will stand at only 97.57 million barrels per day. Around 60% of global supply, or 58.6 million barrels a day, will come from non-OPEC producers, up by 1.2%QoQ.
• U.S. producers have returned to their rigs following the price climb. The EIA expects that the U.S. will raise production to 15.41 million barrels per day in 2017, up by 4%YOY. The number of rigs rose to 744 in February, up by 17% from the end of last year. Moreover, U.S. inventory reached a record high of 528 million barrels in March.
• The Federal Reserve raised the policy rate by 25 basis points in March, and may hike the rate two more times in the second half of the year, for a total rise of 50 basis points. This will strengthen the dollar and put downward pressure on oil prices. Investors are likely to move out of the oil market and into capital markets, given that higher returns are expected there.