26 April 2017

UAE commits to OPEC’s move to drain stockpiles

Maintenance works at some of its oilfields will force the country to switch off its tap, in turn helping the market to reach equilibrium.

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As the production quotas orchestrated by the Organization of Petroleum Exporting Countries (OPEC) take hold and slowly make their impact on global crude oil prices, the UAE is keen to play its part as well in stabilising markets.

“UAE production cut for March and April will be more than 139,000 barrels per day [bpd] due to maintenance activities, which means more than 100% compliance,” said energy minister Suhail Al Mazroui. “(The) UAE is committed to its share of the production cut agreed with OPEC.”

The UAE, along with its OPEC peers and a number of non-OPEC allies had pledged to cut 1.8 million bpd of oil for six months starting January, but the results have been mixed.

In recent weeks, crude oil prices have fallen below USD 50 per barrel, as OPEC’s restrained production has been offset by higher output from North America.

Despite the surge in US oil production, the US Department of Energy said oil markets are showing signs of closer balance between supply and demand in early 2017.

“Although estimates of January and February crude oil production will remain unconfirmed for another month or two, voluntary oil supply reductions by members of OPEC and some non-OPEC producers (following agreements in late 2016) appear to be achieving a high degree of compliance,” the department said.

The 10 OPEC members moved closer to full compliance with the landmark production cut agreement signed late last year, as output in the month fell from January levels to average 32.03 million bpd, according to an S&P Global Platts survey of analysts.

 

Overall, taking an average of January and February production, the OPEC members obligated to reduce output under the deal have achieved 98.5% compliance of their total combined cuts, according to the survey, up from 91% in January.

“A Saudi-led OPEC is showing the market it is serious in making the agreement stick. While it remains an open question whether OPEC will achieve its goal of drawing down stocks sufficiently to re-balance the market, OPEC is fulfilling its commitment, certainly in contrast to non-OPEC partners who are some ways from cutting down to their agreed levels,” said Herman Wang, OPEC specialist at S&P Global Platts.

A Reuters poll shows that OPEC will have to extend its oil output curbs beyond June to drain inventories.

Six of the 10 analysts polled by Reuters said they believe OPEC will extend its output cuts beyond June this year; two analysts felt the group did not need to extend the deal, while the other two were undecided.

BALANCING ACT

But for now, the market is taking a while to balance. So much so that observers are concerned that a decline in prices could lead to further market volatility and weaken the industry, thus destabilising the supply side of the equation.

“Another period of falling prices could have further pushed back critical investment decisions, and threatened the production recovery needed,” said the International Energy Agency in a report. “As it stands, when investment does recover, it will serve an industry that is far leaner and fitter than it ever was and that will be able to deliver more with less.”

Some analysts said the market’s obsession with US inventories and production surge is ignoring the lack of inventory and production declines elsewhere in the world, especially in OECD countries.

But both the International Energy Agency (IEA) and OPEC believe rising crude demand and a draining of inventories should help markets reach equilibrium.

“In 2017, world oil demand is expected to stand at 96.31 million bpd, showing a growth of 1.26 million bpd, higher by approximately 70,000 bpd from the previous month’s projections,” OPEC said in its latest report.

Most of the oil demand growth is anticipated to originate from Asia, led by India and China, and followed by OECD America.

OPEC and non-OPEC co-operation should help lift prices and lead to even more global economic growth and – in a virtuous circle – higher oil demand in 2017.

The IEA noted that: “unless additional projects are given the green light soon, towards the end of our forecast horizon we will be in a 104 million bpd market and the call on OPEC crude and stock change rises from 32.2 million bpd in 2016 to 35.8 million bpd in 2022.”

With the group forecast to add 1.95 million bpd to production capacity during the period, available spare production capacity will fall below 2 million bpd, the IEA added.

OPEC production compliance (in million b/d)

Country

February

Change

January

Algeria

1.04

-0.01

1.05

Angola

1.66

0.03

1.63

Ecuador

0.52

0

0.52

Gabon

0.19

-0.01

0.2

Iran

3.75

0.03

3.72

Iraq

4.4

-0.08

4.48

Kuwait

2.71

0.01

2.7

Libya

0.67

0

0.67

Nigeria

1.7

0.05

1.65

Qatar

0.63

0.01

0.62

Saudi Arabia

9.85

-0.13

9.98

UAE

2.9

-0.03

2.93

Venezuela

2.01

0

2.01

Total

32.03

-0.13

32.16

Source: S&P Global Platts

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