$75 in 2017? | Russell T. Rudy Energy LLC
The agreement between OPEC and non-OPEC countries to reduce production was cheered from Midland to Kuala Lumpur. A recent article in “Rigzone” provides some details of the agreement and insight as to the implications.
While some industry observers contend that the market was already starting to rebalance, the accord is clearly a significant development. Many, such as myself, were skeptical that any agreement would be reached within OPEC, much less one that would include non-OPEC producers. OPEC has agreed to reduce output by 1.5 million barrels of oil per day (bopd), about 200,000 bopd more than was proposed at the last meeting in Algiers. This would bring OPEC production down to 32.5 million bopd.
About 500,000 bopd of production cutbacks would come from Saudi Arabia. Essentially, the Desert Kingdom would absorb about 40% of the total OPEC burden. In spite of previous protests, Iraq agreed to cutback by 210,000 bopd. The deal is effective January 1, and will remain in effect for 6 months. Apparently it is felt that by then, supply and demand will be in equilibrium and the global oil glut will be disappearing. Of equal importance, non-OPEC nations agreed to cut production by 600,000 bopd with half of the reduction coming from Russia.
The obvious question at this point is whether the parties to the agreement will comply and if not, how will it be enforced? OPEC’s response was to appoint a ministerial committee to monitor implementation and actual production volumes. David Pursell, with energy investment banking firm Tudor Pickering and Holt, believes that “Compliance should be high, but naysayers will suggest OPEC will cheat. History suggests that compliance is high initially and does erode over time as oil prices increase.”
In addition to the production cutbacks, global oil demand is expected to increase by 1.2 million bopd by the end of 2017. In a vacuum, decreasing supply and increasing demand would mean higher prices. However, U. S. shale producers will play a key role. As Michael Burns, with international law firm Ashurst LLP, observes, “If that level is enough for some of the shale producers to make money, then they may well turn the taps on and you may see an adjustment to the price. It is only then that we’ll be able to see the power that OPEC has. If shale depressed the price again, then OPEC would have to cut further, and the question is, would they be prepared to do that?”
Admittedly many observers are impressed with the production cutbacks, and are predicting $75 oil in 2017. However, Burns cautions, “But I don’t think it gives the signal that we need to see $70 prices tomorrow. I suspect it may give stability for a period rather than any rapid increase.”
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/147617/OPEC_Crude_Cut_Could_Push_Oil_to_75_Per_Barrel_in_2017/?all=HG2 .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
