Investing.com - Oil prices surged on Monday, hitting the highest levels since July 2015 after major oil producers reached a deal over the weekend to cut output in a bid to rebalance the oversupplied global market.
The Organization of the Petroleum Exporting Countries and non-OPEC producers, including Russia, on Saturday reached their first deal since 2001 on coordinated production cuts to rein in oversupply and drive prices higher.
Producers from outside OPEC agreed to cut output by 558,000 barrels per day, short of the initial target of 600,000 bpd, but still the largest ever output cut by non-OPEC nations. Of that, Russia will cut 300,000 bpd.
The agreement came after OPEC late last month announced plans to cut output by 1.2 million barrels per day from January 1.
Oil prices received an additional boost after top OPEC exporter Saudi Arabia indicated that it may be prepared to make deeper cuts than the 486,000-barrel cut it had originally pledged in the November 30 meeting.
Oil prices have climbed above $50 a barrel since OPEC agreed on its first production cut since 2008 aimed at propping up prices after a two year slump.
Oil production has been outstripping consumption by between one to two million barrels per day since late 2014.
But doubts have emerged over how effective the cuts will be at rebalancing the market with some analysts skeptical on the ability of major producers to adhere to output limits.
Some analysts have also warned that the cuts are likely to cause other producers, particularly U.S. shale drillers, to quickly ramp up output as prices rise.
Oil Price - Dec 12
Oil Price - Dec 12
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - Dec 12
Comments below from John White at Roth Capital:
Crude Oil/Macro:
The upstream sector of the oil and gas industry received more good news this week and, in our opinion, the sector needs good news. On Saturday, 12/10/2016 Reuters reported that OPEC and non-OPEC countries agreed on the first global oil pact since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices that overstretched many budgets and spurred unrest in some countries. Russian Energy Minister Alexander Novak told the media, "Today's deal will speed up the oil market stabilization, reduce volatility, attract new investments."
Non-OPEC producers agreed to reduce output by 558,000 b/d, short of the initial target of 600,000 b/d but still the largest contribution by non-OPEC ever. Of that total, Russia will cut 300,000 b/d, Novak said. He added it would be gradual and by the end of March Russia would be producing 200,000 b/d less than its October 2016 level of 11.2 million b/d.
Apart from Russia, the talks on Saturday were attended by or had comments or commitments sent from non-OPEC members Azerbaijan, Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Sudan and South Sudan. To be clear, many of the non-OPEC members' contributions to lower production would be through “managed natural decline," delegates said, meaning they won’t cut output deliberately and rather let production fall as aging fields yield less. The use of natural decline as part of the non-OPEC deal is likely to dampen its impact.
Last week, OPEC agreed to slash output by 1.2 million b/d, with top exporter Saudi Arabia cutting as much as 486,000 b/d.
Reported separately by Bloomberg, Saudi Arabia signaled it’s ready to cut oil production more than expected, a surprise announcement made minutes after Russia and several non-other OPEC countries pledged to curb output next year. "This is shock and awe by Saudi Arabia," said Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London. "It shows the commitment of Riyadh to re-balance the market and should end concerns about OPEC delivering the deal." "I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30," Saudi oil minister Khalid al-Falih said after today’s meeting.
MY TAKE: If Saudi Arabia announces a big production cut in early January, we will see WTI move to over $60/Bbl in Q1. - Dan
Crude Oil/Macro:
The upstream sector of the oil and gas industry received more good news this week and, in our opinion, the sector needs good news. On Saturday, 12/10/2016 Reuters reported that OPEC and non-OPEC countries agreed on the first global oil pact since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices that overstretched many budgets and spurred unrest in some countries. Russian Energy Minister Alexander Novak told the media, "Today's deal will speed up the oil market stabilization, reduce volatility, attract new investments."
Non-OPEC producers agreed to reduce output by 558,000 b/d, short of the initial target of 600,000 b/d but still the largest contribution by non-OPEC ever. Of that total, Russia will cut 300,000 b/d, Novak said. He added it would be gradual and by the end of March Russia would be producing 200,000 b/d less than its October 2016 level of 11.2 million b/d.
Apart from Russia, the talks on Saturday were attended by or had comments or commitments sent from non-OPEC members Azerbaijan, Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Sudan and South Sudan. To be clear, many of the non-OPEC members' contributions to lower production would be through “managed natural decline," delegates said, meaning they won’t cut output deliberately and rather let production fall as aging fields yield less. The use of natural decline as part of the non-OPEC deal is likely to dampen its impact.
Last week, OPEC agreed to slash output by 1.2 million b/d, with top exporter Saudi Arabia cutting as much as 486,000 b/d.
Reported separately by Bloomberg, Saudi Arabia signaled it’s ready to cut oil production more than expected, a surprise announcement made minutes after Russia and several non-other OPEC countries pledged to curb output next year. "This is shock and awe by Saudi Arabia," said Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London. "It shows the commitment of Riyadh to re-balance the market and should end concerns about OPEC delivering the deal." "I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30," Saudi oil minister Khalid al-Falih said after today’s meeting.
MY TAKE: If Saudi Arabia announces a big production cut in early January, we will see WTI move to over $60/Bbl in Q1. - Dan
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - Dec 12
Comments below from Adam Longson, CFA, CPA – Morgan Stanley
Non-OPEC Participation Should Add to Bullish Sentiment.
As expected, Non-OPEC producers agreed to cut production almost 600 kb/d from Nov-16 levels, which should continue to support the oil rally into 2017. Although the deal fell short of the stated target (only 558 kb/d) and takes advantage of some already expected declines, it would still represent up to a 190 kb/d incremental cut vs. our 2017 estimates if fully implemented. Several aspects were more positive than expected as well. 1) Russia was named to the monitoring committee increasing the probability of compliance. 2) Kazakhstan has agreed to cut production (despite allowing Kashagan to ramp through 2017) after previously forecasting growth. Compliance and skepticism will remain, but any evidence of cheating (if it occurs) won’t be evident for some time. However, there were some nuances of the deal that dampen our enthusiasm. Investors also need to be careful not to compare the cuts against the expected 2017 avg YoY growth, but vs. Oct/Nov levels. Lastly, any stronger rally in oil will also further fuel US growth in 2H17, just as these agreements sunset.
Libya and Nigeria Remain Key Risks to OPEC Success.
According to Rapidan Group, Libya’s recent production gains are likely secure, and odds of Libya breaching 750 kb/d near term are now 55% - complicating OPEC’s effort. Output of 900 kb/d in early 1Q17 and 1.1 mb/d by mid-year is now within reach, which is consistent with NOC goals. This compares to Oct production of 528 kb/d in the Vienna agreement. Conversely, Nigeria exports have slipped again after militant attacks and should remain volatile.
Non-OPEC Participation Should Add to Bullish Sentiment.
As expected, Non-OPEC producers agreed to cut production almost 600 kb/d from Nov-16 levels, which should continue to support the oil rally into 2017. Although the deal fell short of the stated target (only 558 kb/d) and takes advantage of some already expected declines, it would still represent up to a 190 kb/d incremental cut vs. our 2017 estimates if fully implemented. Several aspects were more positive than expected as well. 1) Russia was named to the monitoring committee increasing the probability of compliance. 2) Kazakhstan has agreed to cut production (despite allowing Kashagan to ramp through 2017) after previously forecasting growth. Compliance and skepticism will remain, but any evidence of cheating (if it occurs) won’t be evident for some time. However, there were some nuances of the deal that dampen our enthusiasm. Investors also need to be careful not to compare the cuts against the expected 2017 avg YoY growth, but vs. Oct/Nov levels. Lastly, any stronger rally in oil will also further fuel US growth in 2H17, just as these agreements sunset.
Libya and Nigeria Remain Key Risks to OPEC Success.
According to Rapidan Group, Libya’s recent production gains are likely secure, and odds of Libya breaching 750 kb/d near term are now 55% - complicating OPEC’s effort. Output of 900 kb/d in early 1Q17 and 1.1 mb/d by mid-year is now within reach, which is consistent with NOC goals. This compares to Oct production of 528 kb/d in the Vienna agreement. Conversely, Nigeria exports have slipped again after militant attacks and should remain volatile.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group