Energy Prospectus

Martijn Rats, CFA – Morgan Stanley
November 30, 2016 7:00 PM GMT

OPEC re-confirms Algiers accord...: OPEC announced today an agreement to reduce oil production to 32.5 mb/d, down 1.2 mb/d from the reference level.

On top, OPEC has received pledges from several non-OPEC countries to reduce output by a further 0.6 mb/d, half of which is to be delivered by Russia.

The agreement is effective from 1 Jan 2017 and lasts for 6 months, with an option to roll-over the agreed country quotas for another 6-month period. ...with detailed country-by-country production quotas: Saudi Arabia has agreed to take the largest cut of ~480 kb/d, supported by meaningful cuts from Iraq (210 kb/d from the October level), Kuwait and UAE (both down 130 kb/d). Libya and Nigeria are exempt from output cuts, and Indonesia's membership has been suspended, although its production of ~0.7 mb/d is still included in the group's target. Although the 11 (out of 14) countries that are subject to a quota have agreed to cut output by 1.4 mb/d relative to their reference levels, this is only a 0.96 mb/d cut relative to October output. On consensus estimates for the 'call on OPEC', this implies stock draws from 2Q 2017 onwards.

If OPEC indeed brings production back to 32.5 mb/d, oil markets would be balanced from 2Q17, on those estimates. If non-OPEC reduces output by another 0.6 mb/d, the 'call on OPEC' would be higher by that amount. In that scenario, the oil markets would be in deficit as early as 1Q17 with stock draws possibly as high as 1.5 mb/d in 2H17, assuming full compliance.

Key excerpts from OPEC press release and communiqué

"...in line with the ‘Algiers Accord’, the Conference decided to implement a new
OPEC-14 production target of 32.5mb/d, in order to accelerate the ongoing
drawdown of the stock overhang and bring the oil market rebalancing forward."

"Current market conditions are counterproductive and damaging to both
producers and consumers, it is neither sustainable nor conducive in the mediumto
long-term. It threatens the economies of producingnations,hinders critical
industry investments, jeopardizes energy security to meet growing world energy
demand,and challenges oil market stability as a whole."

"The numbers underscore that the market rebalancing is underway, but the
Conference stressed that OECD and non-OECD inventories still stand well
above the five-year average [..] The Conference also noted the drop off in
investment levels in both 2015 and 2016,as well as the huge layoffs the
industry has witnessed in recent years. It emphasized the importance of
continued investments for an industry thatneeds regular and predictable
investments to provide the necessary supply in the medium- and longer-terms."