Tuesday 10, January 2017 by Isla MacFarlane

Oil prices up 45 per cent at the end of 2016

2016 closes with oil prices up more than 45 per cent, thanks to OPEC’s decision to return to supply management, according to the National Bank of Kuwait (NBK).

2016 closed with oil prices in the high 50s and markets optimistic that agreed upon OPEC/non-OPEC crude production cuts will lead to firmer prices in 2017, NBK said in an economic update. Brent crude, the international benchmark, was up at close to $57 per barrel (bbl) by the year’s end, a rise of 52.4 per cent in 2016; West Texas Intermediate, the US crude marker, ended the year at $53.7/bbl, up 45 per cent on the start of the year.

“According to recent reports, Saudi Arabia, and its GCC allies have already instructed their respective refinery customers to expect fewer deliveries beginning this month,” NBK said. “The Kuwaiti press reported last week that the country’s production will be officially cut by 130,000 b/d to 2.75 mb/d in January. Russia has also instructed its oil companies to curb their output.” 

However, OPEC, for its part, may need to consider more severe cuts than its members initially signed up for, judging by the group’s aggregate production figure of 33.87 mb/d in November. The latter is 150,000 b/d higher than the group’s October reference baseline, thanks to returning Libyan and Nigerian crude supplies. Saudi Arabia and its GCC neighbours most likely will have to offset these gains with larger production cuts of their own if the group intends to keep to within its target range, NBK said.

Data out of the US in December revealed that oil drillers were returning idled rigs back online at the fastest rate since March 2014, with 65 oil rigs added by the end of the month, bringing the total US oil rig count up to 525 – the highest since last January.

US crude production is back up to around 8.7 mb/d, despite two consecutive weeks of declines. US shale’s gains prompted the International Energy Agency (IEA) last month to revise up its forecast for US production growth in 2017 by 70,000 b/d.

On the demand side, the IEA has just revised up its global oil demand forecast for 2016 and 2017. The agency now estimates that growth will come in 120,000 b/d higher at 1.4 mb/d in 2016 and 100,000 b/d higher at 1.3 mb/d this year thanks to better-than-expected US crude demand and revisions to Russian and Chinese crude data.

Taken together, still-relatively buoyant crude demand growth and curtailing OPEC/non-OPEC supply should see the balance of supply and demand swing into deficit during the first half of 2017. The IEA reckons it could be by as much as 0.6 mb/d. Should oil prices reflect this changed dynamic then, conceivably, by OPEC’s next ministerial meeting in June, the group could be congratulating itself on a job well done.

“But of course, not only does this assume that both OPEC and non-OPEC producers do indeed stick to their individual production quotas, which would be no mean feat given their history of producing above their targets, but also that US shale doesn’t reemerge even stronger than before,” NBK said. “In any case, as with 2016, this year is likely to demonstrate once again that OPEC still has the power, both rhetorically and materially, to move markets.” 

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