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New challanges for struggling oil producers

TORONTO: How would the oil markets fare in 2017? Too many variables are in play. Volatility is all but certain. Producers, Opec and non-Opec alike, face a new balancing challenge in 2017: boosting prices without igniting shale.

The agreed upon Opec and non-Opec output cuts set prices surging upward, surpassing the $50 a barrel threshold for the first time in many months. A major challenge to the agreement could come from the dozens of US drillers who survived the rout by becoming leaner and more efficient. “The question really should be what happens afterwards – how fast is US shale going to come back?” Ed Morse of Citigroup counterposed.

After three years of turmoil, there are now signs of a rebirth in America’s shale fields. If prices jump by another $10, touching $60 mark, US shale output that’s now at 4.5 million bpd could quickly rise by 500,000 bpd, Morse wrote in a Dec 22 note.

At 8.8 million bpd, the US is already pumping almost as much crude as two years ago, with just a third of the rigs it operated at the peak. Since May 2016, drillers have added about 200 rigs, taking advantage of rising prices as talk of an Opec supply cut circulated.

A bigger boost in prices could mean a million-barrel shale surge from the US, Macquarie Research analysts noted in a Dec 12 report to clients. That would all but obliterate the cuts Opec agreed to in November.

Other challenges too, haunt the markets. Producer’s effort to balance the oil markets could also be impacted adversely, because of the crimping crude demand from China. Cutting production has boosted prices, and that could result in less strategic buying from China, says Matt Smith of ClipperData. China has been on “bouts of bargain hunting and opportunistic purchases to essentially fill their stockpiles, their strategic reserves” while prices remained low. And so, “as prices rise, we’re likely to see less of that bargain hunting next year,” he said.

In the meantime, the US Department of Energy (DoE) could begin to sell off some of its strategic petroleum reserve (SPR) as soon as this month. And this could impact the markets negatively. Congress has the authorised the DoE to sell off $375.4 million worth of oil in its recent budget resolution. The DoE said that such a sale could be held in January 2017. While these volumes are not significant, they might put pressure on prices.

Analysts are also keenly monitoring the level of compliance with the agreed output cuts. The group’s members “tend to cheat,” former Saudi oil minister Ali Al-Naimi conceded in a speech on Dec 2. He also expressed scepticism that Russia, considered a wildcard during talks, would follow through on its promise to reduce its output by 300,000 barrels a day. “Will Russia cut?” Al-Naimi asked. “I don’t know. In the past, they didn’t.”

Compliance could thus be an issue. But producers appear serious. In order to ensure compliance, the Opec and non-Opec producers committee, formed to monitor compliance is expected to meet on Jan 13. Oil markets rallied after news of the meeting emerged, as it gave credence to their seriousness.

Threats from within too continue to haunt. Nigeria and Libya got exemptions because conflicts in both countries damaged their output. If each nation reached its potential this year, then their additional barrels would almost wipe out the producer group’s supply cuts.

Analysts are thus bullish early, bearish later.

Barclays see WTI prices averaging $56 in 2017, up from $44 over 2016 as the proposed cut could go deep enough to spur activity in US shale basins that would ultimately push prices back down in the second half of the year. “The strategy is bound to overshoot, in our view, leading to higher tight oil production and lower oil prices in the second half of next year,” it said in a Dec 12 research note.

“Oil exporters subject to the recent Opec and Opec/non-Opec accords still need to contend with a litany of bearish factors in the coming weeks,” Citi analysts said in their Dec 19 research note. They see WTI prices averaging $55 over 2017, ending the year at $62.

Markets are not settled — yet. Despite the recent gains, the New Year begins with a mark of uncertainty.

courtesy :dawn news

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