Opec needs output cuts to balance oil market

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Opec’s own projections for the oil market show the cartel needs to maintain or increase output cuts beyond the first half of this year if it wants to balance the market, with supply still threatening to overwhelm demand in 2017. Sample the FT’s top stories for a week You select the topic, we deliver the news. Select topic Enter email address Invalid email By signing up you confirm that you have read and agree to the terms and conditions, cookie policy and privacy policy. In its closely watched monthly report, Opec forecast demand for its crude this year would average just 32.1m barrels a day, an increase on 2016 but still below its target output level of about 32.5m b/d. The forecast from Opec’s in-house analysts comes after Saudi Arabia, the largest and most powerful member in the 13-member cartel, suggested this week that the output cuts agreed in November might not need to be extended beyond the first half of this year. Khalid al Falih, Saudi Arabia’s energy minister, said the market should be coming into balance by the time Opec next formally meets in May, likely reducing the need to extend the agreed cuts for another six months. Oil prices have rallied almost 20 per cent to $55 a barrel since Opec agreed to curb output in late November, with countries outside the cartel, including Russia, also pledging to reduce output. But there remain concerns the curbs may not be enough to draw down the massive build-up in oil inventories that have grown since 2014, when prices started spiralling lower from above $100 a barrel. Traders are watching closely to see whether the nascent recovery in prices is enough to revive the fortunes of the US shale industry. Opec’s latest monthly report now forecasts US oil production to expand marginally in 2017 having previously predicted a decline. “The main component of US oil output — tight oil — is forecast to grow,” Opec said. “The number of drilling rigs and reactivation of companies’ spending are the two most important factors leading to an output surge in the coming months.” Global demand for crude is expected to continue its strong growth, Opec said, with consumption seen rising by almost 1.2m b/d this year to 95.6m b/d. Opec said its members are expected to meet about 900,000 b/d of that increase. Related article Oil companies prepare to ramp up investment again Energy groups are ready to revive spending following a partial crude price recovery A rebound in non-Opec output by about 300,000 b/d is expected to meet the rest, though that number would have been higher, Opec indicated, if it was not for Russia’s agreement to reduce production. The quarterly projections for demand for Opec’s crude shows the challenge the cartel still faces. In the first quarter demand for Opec crude is seen at just 31.1m b/d before increasing to 31.5m b/d in the second quarter. It is not until the third quarter of 2017, when demand for Opec’s crude is expected to reach 33.3m b/d, that it looks likely global inventories will start falling — though this would require Opec to keep in place its production cuts. In the fourth quarter it is expected to slip back to 32.5m b/d. In December Opec’s oil output was 33.1m b/d, down slightly from a record 33.3m b/d hit in November. Saudi Arabia, Venezuela, the UAE and Nigeria made the largest reductions ahead of the planned cuts taking effect on January 1. Oil prices slipped on Wednesday, with Brent crude dipping 1.5 per cent to a low of $54.51 a barrel, while US benchmark West Texas Intermediate dropped 1.4 per cent to $51.75 a barrel. Copyright The Financial Times Limited 2017. All rights reserved. Y

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