Therefore, QNB expects oil prices to average $55 a barrel in 2017 and to continue converging towards $60 over the medium term.
According to QNB “September brought bad news and good news” for oil prices.
The bad news was the International Energy Agency’s (IEA) warning that weakening oil market fundamentals could delay the rebalancing of the oil market, possibly beyond 2017.
But on September 28, Opec delivered the good and surprising news that its members have agreed in principle to cut production – the first such agreement since 2008.
QNB believes that the two news items broadly offset each other, and that market rebalancing will continue to progress. As a result, QNB maintains its forecast that oil prices will average $45 this year, before rising to $55 in 2017 and $58 in 2018.
The IEA’s assessment that the oil supply glut might persist into 2017 rattled markets. The price of Brent crude oil fell by almost 5% in the two days following the release of the report.
The IEA revised down its forecast for oil demand growth by 0.1m barrels per day (b/d) for both 2016 and 2017. This was a result of “weakening” demand growth from China and India.
On the supply side, non-Opec output continues to decline steeply. US crude oil production has fallen by more than 1.1mn bpd since it peaked in April 2015. But this was more than offset by record oil production from OPEC. Production in Kuwait and the UAE hit their highest levels ever; Saudi Arabia’s output is near a record high; Iraqi production continues to grow; and Iran has reached a post-sanctions peak.
However, on September 28, Opec surprised markets with the news that its members had agreed in principle to limit production to a range between 32.5mn and 33mn bpd.
Given that production from Opec reached 33.5mn bpd in August, according to the IEA, the new limits represent a production cut of 0.5-1.0mn bpd, if implemented. The news buoyed markets. The Brent crude oil price has crossed the $50/b barrier and is currently up by more than 10% since the deal was announced.
While the “deal could expedite the rebalancing process” in the oil market, QNB in an economic commentary said, “there is still uncertainty about its exact details.”
The agreement is not expected to be ratified until the next Opec meeting on November 30. So its implementation could be delayed until 2017. There are still issues to be debated and agreed on regarding individual country quotas. This issue is particularly thorny for two reasons.
First, both Iraq and Iran still aspire to increase their production. Second, both Libya and Nigeria want their output to pick up following disruptions this year. If these countries are exempt from freezing or reducing their production, other Opec members will have to cut deeper in order to maintain the production limit. This could prove difficult given the stretched public finances in many Opec countries.
Until the agreement is ratified and implemented, QNB’s baseline view is that Opec will maintain its production at the near-record high reached in August. This represents a middle ground between the cut implied by the agreement and our previous assessment of continued growth in Opec’s production.
On the IEA assessment and Opec agreement and what these meant for oil prices going forward, QNB said, “We believe that the bearish news from the IEA more or less offset the bullish news from Opec.”
