OPEC – nonOPEC
Last week's short-lasting trend of oil prices' growth in the world markets early in December inspires some optimism both in market players and analysts who justifiably predict an oil price increase up to $60 per barrel in December.
OPEC deal about production cut by 1.2 ml barrels, which is going to gain force from January 1, 2017, includes a quota (0.75 ml barrels) of Indonesia which has left the cartel. According to the deal, Iran must not exceed an average daily oil production (3.797 ml barrels per day) within 6 months whereafter it can increase the level up to 3.975 ml barrels per day, Caspian Energy News reports. OPEC President, Minister of Energy of Qatar Muhammad ben Saleh as-Sada said that the cartel would make a decision about prolonging the production freezing for another 6 months at the following meeting of the cartel scheduled for May.
Facing no resistance factors, the market responded with a strong 13% volatility. February futures for Brent oil rose up to $53.66 per barrel (the price totaled $50.03 per barrel on November 30) at London exchange ICE Futures on December 1. The price for January futures of WTI at e-trading has increased to $51.04 per barrel (the price totaled $48.90 per barrel on November 30) by now, Caspian Energy News (www.caspianenergy.net) reports with reference to the London Exchange ICE Futures.
The Organization possessing over 65% of world oil resources and controlling 33.8% of global oil production has for the first time since June 2014 (the rise of crisis) demonstrated its potential to reach a deal. OPEC has 14 members at present: Algeria, Angola, Venezuela, Gabon (resumed membership in July 2016), Iraq, Iran, Indonesia, Qatar, Kuwait, Libya, Nigeria, United Arab Emirates, Saudi Arabia and Ecuador.
Apart from this, non-OPEC countries such as Russia (planned production shall total 11.2 ml barrels per day in 2017), Mexico (1.944 ml barrels in 2017) and Azerbaijan about 852 tho barrels per day) have made a preliminary confirmation, saying that they will join the cartel at the December 9 meeting.
RF Minister of Energy A.Novak stated that the country would reduce production by 300,000 barrels per day from January 2016. According to GS, basic scenario of the American investment bank envisages maintenance of the Russian production at 11.2 ml barrels per day in 2017. A little later Mexico announced about reduction of production as well. The Ministry of Energy plans to reduce production of hydrocarbons by 215,000 barrels per day in 2017. Mexico has decided to follow its production plan for 2017, which makes 1.944 ml barrels per day. “As far as the position of Azerbaijan is concerned, it is known publicly that Azerbaijan, at the presidential level, has unilaterally stated that it would not increase production and export. We once again would like to note that we have no plans aimed at increasing production”, Minister of Energy of Azerbaijan Natig Aliyev said.
According to estimates of the Russian analysts, to fulfill Mr. Novak’s plans companies will have to kill 4,000 wells or 10.5% of all the operating wells, which seems hardly probable. Production cut for Mexico and Azerbaijan means continuation of the natural production decline trend. In spite of all this, the agreement is likely to be reached on December 9, which is a good basis for possible laying of more well-founded and long-term price increase trend for energy resources.
However, even after long-awaited deals reached between OPEC and non-OPEC states ( a total of 18 countries), there is a number of issues left unsolved – whether the OPEC countries will observe set production limits and whether the oil price increase will lead to the growth of production in USA, Canada and Norway, which will delay market recovery for an unknown period.
Considering the forecasts of EIA, USA will continue increasing oil production. According to short-term assumptions, in June the agency forecasted US oil production at 8.6 ml barrels per day for 2016 and 8.2 ml barrels per day for 2017, while EIA’s data early in December raised the forecast on average domestic production up to 8.8 ml barrels per day for 2016 and 8.7 ml barrels per day for 2017. Since 1970s US oil production reached the maximum rate in June 2015 – 9.5 ml barrels per day. About 5.2 ml barrels of this volume fell to the share of production on shale fields.
Energy program of the newly elected President of USA Donald Trump provides support for domestic energy resources and workforce. He also promised that he would protect interests of metallurgists and car makers, as well as improve infrastructure radically. The President also promised to make a ‘revolution’ in the energy sector by lowering taxes and regulation.
The energy revolution implies use of hydrocarbon-bearing shale rocks, which were suspended at the time and out of reach for old production technologies, as well as onshore and offshore oil, natural gas and coal fields with a total forecast cost reaching about 50 trillion dollars. Every year D.Trump plans to create up to 1.5 ml new working places with a salary fund up to $30bln.
One of the first practical steps of Donald Trump is to allocate a permit for the construction of the 4th stage of the Keystone XL oil pipeline, rejected formerly by the Barack Obama administration in 2013 despite the numerous changes made within the project to minimize the environmental impact. This intention is of principal significance for sooner creation of new transportation capacities so that to increase American and Canadian oil flow to the oil refineries and export terminals of the ports in Gulf of Mexico.
All these measures will certainly let invest in production of both shale fields in the USA and oil sands in Canada. However, the program says nothing certain about the way it is going to combine the interests of the American and Canadian producers (production of shale resources in USA is much cheaper than oil extracted at Alberta and takes less time for development).
According to estimates of Canadian experts, “oil price $60-70 per barrel will draw investments into any project. Canada is the third in the world in terms of the size of oil reserves, which make almost 10% of the world reserves. In the meantime, Canada takes only the 10th position in the list of the biggest oil exporters of the world and 97% of its export goes to USA. Canada has 6 independent from one another oil pipeline projects with the carrying capacity of about 3.2 ml barrels per day, which will let Canada to radically change its export capacities and afterwards change the supply scheme in the world market by directing it towards Europe and Asia.
Considering projects a certain part which has already been approved and ready for launch approximately in 2018, whereas others are to be launched later, by 2021 the market of hydrocarbons will be shocked not only with the US oil and LNG but also with the Canadian oil.
This in its turn threatens with a new collapse of the world market and a new round of crisis.
Apart from this, the latest statements of Donald Trump, who calls trade treaties NAFTA and TTP (let alone the planned Comprehensive Trans-Atlantic Investment and Trade Partnership with the EU) a catastrophe, can inflict damage on the American energy resource exports in case of the USA abandons these agreements, limiting the geography of export. It is possible to lower taxes and regulations, establish a favorable investment climate, increase production of light factions of oil products, but not even Mr. Trump is hardly capable of reducing large transportation leg.
Norway causes risks as well. According to preliminary data, production of liquid hydrocarbons at the Norwegian oil-gas fields increased by 30.13% in October compared to the final figures of September and totaled 2.099 ml barrels per day, says the Norwegian Petroleum Directorate.
Average daily oil production rate totaled 1.714 ml barrels per day in October, which is 4% higher than oil production in October of the last year and 10% above the indicator forecasted by NDP.
Production of Wide spread of light hydrocarbons (WSLH) totaled 353 thou barrels, condensate – 33,000 barrels. Norway is the biggest producer of hydrocarbons in Europe. According to the information of the European Commission, oil-gas sector accounts for about 22% of the country’s GDP and 67% of export. Norway’s share in the global oil market makes 2%.
However, the situation can be more complicated than all market players find it. The crisis of investment into the world oil industry may coincide with the cycle of interest rate increase of Federal Reserve System. “The current interest rate can cause certain risks, therefore a growth can be fixed in near future”, the chair of the Federal Reserve System Janet Yellen warned while addressing the Senate late in November.
Moreover, the growth of money value is an additional disadvantage not only for the American oil producers.
Investors fear that massive non-fulfillment of obligations by the companies of the sector can cause a new financial crisis comparable with that of 2007-2008. As a result, it will bring to the bankruptcy of the financial institutions.
Crisis in its turn can lead the US economy and accordingly the world economy into recession. Therefore, risks of the global economy are now much higher than meets the eye. Taking all these factors into account, reproduction crisis will more likely remain visually, high market volatility will be caused by fluctuation factors such as reduction of oil reserves of the USA and probable limit of production of OPEC and non-OPEC countries. Lack or low level of coordination of action of major world producers, decline of oil consumption growth rates, low rate of investment into raw material industries, new global trade risks will exert pressure on oil quotations until a stable and comfortable for an oil industry $65-$80 per barrel price rate ensures (more likely by the autumn of 2017) inflow of investments and creates new growth rates of power consuming industries, pushing growth rates of the global economy upwards.
President and Editor-in-Chief of Caspian Energy International Media Group