The crude production cuts of 1.2 million barrels agreed to by the Organization of the Petroleum Exporting Countries (OPEC) is at the higher end of market expectations, says Azlin Ahmad, Editor - Crude Oil at Argus Media. However, since actual cuts will be implemented only post January, prices may not immediately jump up and could hover around USD 50 a barrel, she adds.
The OPEC Wednesday agreed to its first output cut since 2008, with Saudi Arabia accepting "a big hit" on its production. Non-OPEC Russia will also join output reductions for the first time in 15 years to help OPEC prop up oil prices.
Ahmad says it now remains to be seen if these cuts are actually and fully implemented as agreed upon. If it goes through there is likely to be a deficit of roughly 5,00,000 barrels per day in the first half of 2017, she says. This could touch one million barrels deficit per day if all producers including non-OPEC members implement cuts.
If everything goes as planned with OPEC and non-OPEC implementing all production cuts then prices could go up to about USD 60 per barrel by mid-2017, she says.
Below is the transcript of Azlin Ahmad’s interview to Latha Venkatesh, Sonia Shenoy and Manisha Gupta on CNBC-TV18.
Sonia: If you can quickly tell us what your view is on where crude prices are headed from here, because Brent is already almost at USD 52 per barrel.
A: The crude prices definitely reacted quite quickly to the outcome of the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna yesterday. And the 1.2 million barrel per day cut, actually OPEC exceeded expectations. The market was expecting already that there was going to be a cut, but 1.2 million barrels per day is actually on the larger end of the market expectations of the cut. So, we see that the oil prices react. It is going to be a little tough for the oil prices to go that much higher in the short-term where as you say, USD 51 per barrel above, for Brent. So, we will probably still hover around the low USD 50s because the actual cuts are only going to be implemented from January. So, until then, we will see volatile but fairly range bound in terms of the oil prices. I do not expect that we are going to see a USD 60 per barrel level in the next couple of weeks for Brent.
Latha: Will OPEC and the oil producers walk the talk? Will they really deliver this kind of a cut?
A: That is for OPEC to answer. The expectations, what they have come together, the producers have come together and despite initial doubts about whether Iraq would accept resources for its baseline production, whether Russia would join in. So, despite all those doubts, OPEC and Russia managed to actually come together and agree to cut. So, that is already a big feat. But yes, obviously, the market will watch very closely what happens in early January to see if the cuts are actually implemented. The cuts need to be implemented because our expectation is that if the cuts are not implemented, we are going to see crude supply in the first half of 2017, still well supplied to the tune of about one million barrels per day if OPEC does not move ahead and implement the cuts that it has announced.
Manisha: Supposing that OPEC does walk the talk and we do see 1.2 million barrels go off the market, what is your sense? Would that take care of the oversupply in the global markets or do you see the non-OPEC, the US markets continue to increase production? Do you see that as a concern?
A: To start off with, our expectations is that if OPEC itself does comply and implement the cuts, we do think that in the first half of 2017 that there will be a crude deficit to the tune of about 5,00,000 barrels per day. And this is even if non-OPEC producers decide not to finally cut output. So, even if OPEC itself moves ahead and implements, we will see a crude deficit. If all the producers come together and cut as they have committed, we expect that there could be a deficit of about one million barrels per day in the first half of 2017. So yes, there will be a big impact. Obviously, as crude prices go higher, we will ultimately see US shale production start to come back. It takes a bit of time. They are not going to switch on the taps within a few weeks or a month. It will take a few months for US shale to come back on. So, in the first half of 2017, if everything goes as planned, we should see the fundamentals tighten.
Manisha: You said that we are going into a deficit in 2017 whether or not OPEC cuts or complies to that. So, what is your sense on prices? You said USD 60 per barrel is perhaps not a possibility, but if we are turning from an oversupply to a deficit in a matter of 6-8 months, would you say the prices have a much higher way to grow from here?
A: Yes. This is assuming that OPEC implements all the cuts that it has announced yesterday. I think that oil prices should be around the mid-USD 50s at least. And if we see OPEC and non-OPEC all come together and implement the cuts that they have announced, we could see oil prices going closer towards the USD 60 per barrel by around mid-2017. So yes, there will be an impact on that.