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2016 have paved the way for a bullish 2017

by Arabian Oil & Gas Staff on Feb 8, 2017


Dr. Faisal Mirza is an advisor on the energy market and has previously worked for OPEC and Saudi Aramco.
Dr. Faisal Mirza is an advisor on the energy market and has previously worked for OPEC and Saudi Aramco.

The year 2016 was a remarkable year in the oil industry. The year began with oil prices at the lows of $27 per barrel but ended with the double of this number at above $55 per barrel. The average oil prices in 2016 was about $43 per barrel which is the lowest average since 2004. The year 2016 already gave optimism sentiment with positive development for bulls to start a very positive 2017, with the commodity heading into a stronger year.

The year 2016 also witnessed the United States lifting oil export ban after 40 years, though the US crude exports increased by only a few hundred thousand barrels a day, the global supply / demand balance was affected with surplus of the undesired light/sweet crude since most of the US refineries are highly sophisticated with heavy sour crude diet. Concisely, the US elected to export the unwanted crude light stream that is difficult to export as mostly from shale oil, while keeping the heavy crude stream that is produced at the US Gulf Coast and easily to export. This has adversely impacted the already oversupplied market.

The year 2016 saw two OPEC/non-OPEC meetings, one failed in April but the other one made a historical success. OPEC countries agreed on an output deal that brought OPEC and non-OPEC to a total production cut of 1.8 MMBD, the first cut for OPEC producers since 2008 and the first cut from non-OPEC producers since 2002. Firmly, such collaborative efforts among OPEC and non-OPEC producers would complement the market in restoring a global oil supply / demand balance, in particular the drawdown in the stocks overhang, which is currently at a very high level. Furthermore, the presumable hedging activities could come back as a necessary milestone and an indicator that rebalancing has advanced along the road to recovery.

Since the failed Doha meeting last April, Arabian Gulf Ministers insisted that any return to production cuts must include concerted action by OPEC and non-OPEC producers, eventually, they came to an agreement after massive efforts of diplomacy and fulfilled that condition.

Extraordinarily, in order to illustrate on the commitment of this output deal, for the first time in history OPEC have implemented a monitoring team that monitor individual country quotas, the monitoring team include members from OPEC and non-OPEC. This will answer the ongoing question if OPEC output deal would ensure complete compliance, thus, for the first time in OPEC’s history, a ministerial compliance team was formulated to monitor production in accordance with the agreed cut!

Whether we agree with OPEC outlooks and studies or not, we must confess that it remains an important discussion forum and a strong agreement platform that brings people from inside out to discuss, negotiate and eventually agree. Though OPEC produces around 35% of global production, but obviously it unfairly bears the entire supply / demand balance burden. Though the oil prices fluctuations weren’t that asymmetric before the output deal, as OPEC abandoning the market strategy hasn’t resulted in steep oil prices fluctuations as the speculators caused in 2008.

It will be interesting reflecting on the historical circumstances that led to the establishment of OPEC. The oil industry has changed markedly over the past century. Fundamental shifts in the economy, including rising globalisation, transformed the industry, enabling new players with unique competitive advantages to participate.

By the Second World War, a few international oil companies came to dominate the industry, controlling nearly 90% of the global oil trade. Hence, the international oil market was a very tight oligopoly dominated by seven major international oil companies. By the establishment of OPEC in 1960, producing nations reclaimed control of their resources, with more participants involved than ever before, the industry has grown more competitive, with each player seeking to maintain a dominant position. Independents expanded abroad; and commodity traders created an independent oil trade, outside the control of the IOCs.

Luckily, OPEC came in a critical timing amid the increasingly globalised international market and the rapid global growth, which increased the demand for the world oil consumption from 1960 to 1970, from around 21.4 MMBD to over 46 MMBD.

To those who have said that the role of OPEC has vanished and has been ineffective two years after letting market forces lead, it eventually came to an acknowledgment that the shale producers can’t survive the competition, rather than balancing the oil markets.

Illustratively, the oil industry has witnessed 1.2 MMBD reduction in US shale oil production since last year when OPEC had to play its dominant role of leading the market before the world could face a catastrophic shortage in oil that resulted in huge upstream capex cut, which has a direct impact on offsetting the natural depletion of reservoirs and on ensuring security of supply to producers. Therefore, OPEC views the low oil prices as setting the stage for a destructive supply crisis.


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