Energy Monitor December Group Economics

Hans van Cleef

OPEC cuts production, but fails to convince

1 December 2016

Oil prices jumped higher, but remained within the neutral range
OPEC meeting outcome: 1.2 mb/d cut by OPEC, 0.6 mb/d cut by Non-OPEC
Longer term outlook still uncertain as both OPEC and non-OPEC producers need to deliver their promises

Figure 1: Oil price peaks and enters neutral phase Oil price volatility jumped higher
(x USD/bbl) Oil prices increased more than 8% after OPEC confirmed again to cut its
crude production by 1.2 million barrels per day (mb/d) as already
55 indicated at the September meeting in Algeria. Non-OPEC producers
will cut production by another 0.6 mb/d, of which half will be done by
50 Russia. Brent oil was pushed above USD 50/bbl and WTI traded above
USD 49/bbl. Despite this first production cut by OPEC since 2008, oil
prices kept trading within the USD 45-53.5 trading range as OPEC failed
45
to surprise.

40 In its opening statement, OPEC indicated that a rebalancing of the

market is already underway. Non-OPEC production fell under pressure
and only a moderate increase is expected for 2017. Global oil demand is
35
expected to continue its growth path with 1.2 mb/d growth. One major
worry is the large stock overhang which is above the 5y average.
30 Therefore, for a production cut to have a sustainable effect on oil prices,
stock levels need to come down as well. OPEC also indicated that
25 market sentiment is driven by short term drivers. However, oil producers
jan feb mrt apr mei jun jul aug sep okt nov and consumers need to consider also the medium and longer term
prospects. In that respect, OPEC still sees the oil market as a growth
Brent WTI
market, with an expected global oil demand at 109 mb/d in 2040, or 16
Source: Thomson Reuters mb/d more than today. To meet future demand, significant investments
are needed to prevent a serious shortage in the future.

The agreement
OPEC decided to cut production with 1.2 mb/d as agreed during the
September meeting in Algiers. Although Indonesias membership will be
suspended, its production cut share is divided among the other
members. Saudi Arabia will cut production most with almost 500 kb/d,
followed by Iraq (-210 kb/d), UAE (-139 kb/d) and Kuwait (-131 kb/d).
Also Iran will cut production somewhat (-90 kb/d). Non-OPEC oil
producers are said to cut production by 600 kb/d. Russia will cut
Table 1: Oil and gas price forecasts ABN AMRO (oil production by 300 kb/d, and the rest must still be finalised at the meeting
prices in USD/barrel, HH in USD/mmBtu, TTF in
in Moscow next week.
EUR/MWh)
Price Q4 2016 Q1 2017 Q2 2017 2016* 2017*
The main question remains whether OPEC and Russia will actually
Brent 50 50 55 45 55
deliver. Or, in other words, will these countries stick to this agreement
WTI 50 50 50 45 55 and actually cut production? In the past, OPEC often failed to meet
HH ** 2.80 2.70 2.50 2.50 2.70 expectations regarding their promises. Moreover, Russia seems to
TTF *** 18.00 16.00 15.00 14.25 14.50 benefit if oil prices increase while keeping its production at current
record levels. The Russian economy has been badly hurt by low energy
Source: ABN AMRO Group Economics prices and the international sanctions in place
* Annual average ** Henry Hub *** Title Transfer Facility
Since the market already anticipated the 1.2 mb/d production cut as
announced in September, oil prices did rally today now the agreement
was confirmed again. However, this agreement did not exceed
2 Energy Monitor December - OPEC cuts production, but fails to convince 1 December 2016

expectations and therefore, oil prices even failed to test the October
Figure 2: OPEC crude production before the agreement
(x kb/d) highs. In the near term, oil prices are expected to continue to trade
within narrow ranges as it is up to the oil producers to show the market
12.000 that the production cut will become effective.

10.000 Looking ahead

Although reaching an agreement was already quite a struggle, bringing
8.000
this to practice will be an even greater challenge. Many OPEC members
have difficulty to cut production although their fiscal budgets are based
6.000
on higher oil prices. After all, there is a risk that higher oil prices would
4.000 trigger a rise in Non-OPEC crude production mainly US shale oil
which would lead to a shift in market share, rather than a sustainable
2.000 higher oil price.

0 Deal or no deal, we still expect higher oil prices in the course of 2017.
Saudi Arabia
Iran
Iraq
Kuwait
Total UAE
Qatar
Venezuela
Nigeria
Indonesia
Libya
Algeria
Angola
Ecuador
Gabon

That is because the market is heading for a balance between supply

and demand anyway. Global demand is expected to rise by 1.2 mb/d in
2017, and non-OPEC supply falls under pressure due to a lack of
investments in the sector as low oil prices still hurt. A deal may speed-
up the process of shifting towards a balance, bringing oil prices towards
OPEC crude production
USD 60/bbl next year. So, if this agreement fails after all, it would only
Source: Energy Intelligence impact temporarily the upside potential of oil prices.

Table 2: Proposed production cut OPEC members

(x kb/d) Proposed production cut

Algeria -50,00
Angola -78,00
Ecuador -26,00
Gabon -9,00
Indonesia **
Iran 90,00
Iraq -210,00
Kuwait -131,00
Libya -
Nigeria -
Qatar -30,00
Saudi Arabia -486,00
Total UAE -139,00
Venezuela -95,00

Total OPEC -1.164,00

** Indonesia suspended its membership

Source : OPEC
3 Energy Monitor December - OPEC cuts production, but fails to convince 1 December 2016

Group Economics | Commodity Research

Hans van Cleef
Senior Energy Economist
tel: +31 (0) 20 343 4679
hans.van.cleef@nl.abnamro.com

Group Economics
Commodity Research team
Jacques van de Wal (Head) tel: +31 20 628 0499 jacques.van.de.wal@nl.abnamro.com
Hans van Cleef (Energy) tel: +31 20 343 4679 hans.van.cleef@nl.abnamro.com
Casper Burgering (Ferrous, Base metals) tel: +31 20 383 2693 casper.burgering@nl.abnamro.com
Georgette Boele (Precious metals) tel: +31 20 629 7789 georgette.boele@nl.abnamro.com

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