Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
1
C
th
N
DE
pa
st
so
of
pr
go
A
Th
st
w
pr
S
O
ad
ec
it’
co
In
im
ar
th
ov
w
pr
w
in
A
Special Rep
Commo
he OP
Next?
ECEMB...
Special Report | December 20162
we view to be in the region of 3.8 to 4m b/d – the increase will probably take Iranian pro...
Special Report | December 20163
Going forward, our sense is that the initial market enthusiasm about the OPEC deal will gi...
Special Report | December 20164
the start of this year, suggesting that the market’s view of prices going forward has beco...
Special Report | December 20165
we expect this trend to continue to play out next year, especially if oil prices continue ...
Special Report | December 20166
wars in the Middle East, it will have little incentive to limit its oil output at the agre...
Upcoming SlideShare
Loading in …5
×

0

Share

Download to read offline

Special Report - Aferthoughts on the OPEC agreement

Download to read offline

Aferthoughts on the OPEC agreement

Related Books

Free with a 30 day trial from Scribd

See all

Related Audiobooks

Free with a 30 day trial from Scribd

See all
  • Be the first to like this

Special Report - Aferthoughts on the OPEC agreement

  1. 1. 1 C th N DE pa st so of pr go A Th st w pr S O ad ec it’ co In im ar th ov w pr w in A Special Rep Commo he OP Next? ECEMBER 2 fter w count Nove are back to tart of Janu ome 15% o f OPEC be rices will b oing forwa A change he OPEC tates were with much f rices since audi-led O OPEC prod djustment conomy an s keen to ommunity a n terms of mplemente round 33.7 he region o ver past se which has roduction l while small ncrease pro A ort | December odities EC Ag 2016 weeks of tries – with ember to cu otal OPEC uary but h or so in the eing “back be support rd and for e in Saud meeting o able to pu fanfare. Ind e the oil p OPEC strat ucers. The to live wit nd, as part boost cur and perha f the spec d – would 7m b/d. Th of 0.2m b/d everal mon committed levels (see Gulf state oduction in r 2016 s – Afte greeme conflicting h the ultim ut producti C productio as already e initial per in busines ted on the the time b di-led OP on 30 Nove ut aside th deed, the rice collap tegy of inc e Kingdom th much lo t of this pro rent oil pri ps, more im cifics of the d reduce O his is more d to 0.7m nths. The d itself to e Chart 1). s will redu n 2017 to 3 erthoug ent & W g statemen mate aim of on to the t on to 32.5m y solicited riod after th ss”, we tak e back of eing strugg PEC strat ember was eir differen agreement pse that be reasing m m’s shift in ower price ocess, part ices in ord mportantly e deal, th OPEC pro e than envi b/d were t biggest cu reduce p Iraq is se ce produc 3.8m b/d. A ghts on What nts and a f boosting tune of aro m b/d. This a sharp m he deal wa ke a rather this deal, gle to brea tegy… s much an nces and r t marks th egan in Ju arket shar strategy c es. Additio t-privatise der to garn y, it’s dome e agreem oduction by isioned at touted – b uts will not roduction et to delive ction by a c As Iran is a n AM ECO T: + E: A The A me a wave of oil prices ound 1.2m s agreemen market resp as announc r less sang they will ak out of th nticipated a each a pro e first acti une 2014. re and putt comes as t onally, with its flagship ner greater estic popula ent spans y around the meetin ut only be surprising by around er the seco combined approachin IR KHAN ONOMIC RE +44-(0)20-75 Amir.Khan@ Bank of Toky ember of MUFG Spec diplomati – reached b/d, a mov nt is set to ponse, with ced. While guine view essentially e US$50-6 and the fac oduction ag on by OPE It also sig ting pressu the country h Riyadh l p oil compa r buy-in fro ation. the first 1.2m b/d f ng in Sept cause pro ly be deliv d 0.5m b/ ond largest 0.3m b/d. g its produ ESEARCH O 577-2180 @uk.mufg.jp kyo-Mitsubish G, a global finan cial Re ic activity, d an agree ve which if o come into h oil prices e this has re w and feel t y remain r 60/b pricing ct that OP greement EC to bols gnals a ch ure on hig y faces a s looking to any – Sau om the glo half of 20 from curre tember – w oduction ha vered by S /d relative t reductio Iran will b uction capa OFFICE | LON hi UFJ, Ltd. cial group eport the OPE ement on 3 f realised w o force at th s reboundin ekindled ta that while range-boun g band. PEC memb was greete ster crude hange in th h-costs no severe fisc diversify udi Aramco obal invest 017 and – ent levels when cuts as increase Saudi Arab to Octob n (0.2m b/ e allowed acity – whic NDON EC 30 will he ng alk oil nd ber ed oil he on- cal its o – tor – if of in ed ia, ber /d) to ch
  2. 2. Special Report | December 20162 we view to be in the region of 3.8 to 4m b/d – the increase will probably take Iranian production to the highest possible level without further investment. Separately – but integral to this deal – is the involvement of non-OPEC countries, led by Russia, who on 10 December agreed to formally cut their production by a combined 0.6m b/d. Of this this figure, the largest cuts will be shouldered by Russia (0.3m b/d), followed by Mexico (0.1m b/d) and Azerbaijan (0.04m b/d). Taken together, the proposed cuts by both OPEC and non-OPEC countries amount to 1.8m b/d. While this on paper seems pretty impressive, implementation risks remain high. Among the OPEC countries, this is especially the case in Iraq, where the dire security and fiscal situation makes a meaningful cut rather difficult. Moreover, Libya and Nigeria are exempt from the agreement as production in both countries is recovering from security related issues. Libyan production increased to 0.5m b/d in October, doubling since August, but still only a third of the pre-war level. Nigerian production increased to 1.6m b/d which is still lower the 2014 level of 1.9m b/d. …Which has solicited a euphoric response on the part of the markets Notwithstanding the implementation risks outlined above, the markets have used the OPEC accord as a rallying call. Indeed, in the initial three day period after the deal was struck, prices rose to the tune of 15% to over US$54/b. While they dipped slightly thereafter, the subsequent agreement with non-OPEC countries, served as another leg-up in oil prices. In fact, for a short period oil prices breached US$57/b, though they have backed up somewhat since and appear to be hovering around the US$55/b mark. Notwithstanding this, if key technical gauges, such as the 200-day and 50-day moving averages are any guide, oil price from a momentum perspective continue for the time being to hold their own (see Chart 2). -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 S. Arabia Iraq UAE Kuwait Venezuela Angola Algeria Qatar Ecuador Gabon Iran (Million, b/d) Chart 1: Distribution of production cuts among OPEC member states (Source) OPEC, Press reports, BTMU Economic Research Office
  3. 3. Special Report | December 20163 Going forward, our sense is that the initial market enthusiasm about the OPEC deal will give way to a greater focus on whether the proposed cuts are in fact achievable. With this in mind, we are of the opinion that oil prices going forward are likely to struggle to rise much beyond their current levels and, if anything, are likely to remain range-bound within a pricing band of around US$50-60/b. Our sense is that the short-term market response may have been overdone While the U-turn performed by OPEC to try and put a floor under oil prices, has on the whole been well received – especially in light of the austerity drive some oil producing countries, including those in the GCC – have been undergoing recently, we do not necessarily see these cuts as a game-changer in their present form.  For one thing, the proposed cuts still need to be enacted and, as we alluded to above, with some OPEC countries exempt from the cartel’s production agreement, actual OPEC production could still surprise on the upside going forward (see below). Additionally, the agreement is also contingent on the cooperation of non-OPEC countries, such as Russia, for which there are few, if any, historical precedents. While Russia’s commitment to undertake production cuts to the tune 0.3m b/d seems to be pretty bold move, at least on paper, we question the willingness of the country to see this through, especially in light of its current fiscal predicament. A further point worth noting here is that new production facilities are expected to come on stream in certain countries such as Brazil, Canada and Kazakhstan. With regard to latter, a case in point is the Kashagan oil field, which started production this October and, according to ENI, one of the developers of the field, could through the course of next year ramp up production to around 0.4m b/d.  Second, the recent rally in oil prices owes much to investor/hedge fund positioning, which since the start of this year has seen a rather dramatic unwinding/liquidation of net short positions (see Chart 3), with the result that the subsequent rebound in prices has been sharper than one would have expected on the basis of fundamentals alone. This view, in our mind is also supported by the shape of the futures oil price curve which – while it continues to slope upwards following the OPEC meeting – has flattened somewhat since 20 40 60 80 100 120 140 10 11 12 13 14 15 16 Actual price 200-day MA 50-day MA Chart 2: Oil prices continue to hover above key technical levels (US$/barrel) (Source) Macrobond, BTMU Economic Research Office (Year)
  4. 4. Special Report | December 20164 the start of this year, suggesting that the market’s view of prices going forward has become somewhat bearish, such that it no longer believes oil prices will breach the US$60/b as far out as 2022 (see Chart 4). While this is by no means a perfect measure of future oil prices, it serves to highlight that – in an environment where the ability of OPEC to deliver on these cuts is not certain – markets are still cautious about the outlook for oil prices looking ahead. Moreover, while it’s fair to say that the recent oil rally may bring some immediate relief to oil producing countries, at current levels of around US$55/b or above, prices are still meaningfully short of the level required for most OPEC countries to break even in terms of their underlying budgetary and external current account positions (see Chart 5).  Third, while symbolically speaking the OPEC’s proposed cuts are significant, there are other moving parts that also need to be considered. Foremost here is how US shale producers – which over the past decade or so have upended the traditional workings of the oil industry – will respond to any OPEC-induced oil price rises. Our sense is that in light of the efficiency/operational improvements that the shale oil producers have undergone recently to survive the oil price rout, they will be tempted to ramp up production if, on the back of the OPEC cuts, prices continue to trend upwards from their current levels of around US$55/b. Indeed, with the US rig count – and the associated rise in US oil production – already seeing a noticeable pickup since hitting a low-point earlier this year (see Chart 6), -10000 0 10000 20000 30000 40000 50000 60000 70000 12 13 14 15 16 Net short position have fallen >70% from their high point ealier this year (Source) Macrobond, BTMU Economic Research Office (Year) Chart 3: Net short positions continue to be unwound... 50 52 54 56 58 60 62 64 2017 2018 2019 2020 2021 2022 Jan-16 Dec-16 (US$/b) Chart 4: ...But the oil future curve has flattened somewhat suggesting that the market takes a cautious view towards future oil prices (Source) Bloomberg, BTMU Economic Research Office (Year) 0 20 40 60 80 100 120 140 160 180 Libya Bahrain Algeria Oman S.Arabia Qatar Iran UAE Iraq Kuwait Fiscal breakeven External breakeven (US$/barrel) Chart 5: Fiscal & external breakeven positions of selected OPEC countries in 2017 (Source) IMF, BTMU Economic Research Office
  5. 5. Special Report | December 20165 we expect this trend to continue to play out next year, especially if oil prices continue to exhibit an upward bias going forward.  Finally, on the demand side, while the overall prospects of the global economy remain rather lacklustre at, or around, the 3% per annum mark, there has been ongoing conjecture in the financial press and media, more broadly, that the recent election of Donald Trump in the US, with his focus on tax cuts and infrastructure spending, will help to spur US demand for different commodity groups as a whole. We, however, take some issue with this on the ground that, in the energy space, Trump will seek to promote US energy independence and, as part of this process, he may be inclined to water down existing environmental regulations and give tax inducement to US oil and gas firms to boost their current production levels. The net result of all this, at least over time, could be a material pick-up in US oil production, a development which, in turn, could help to offset any supply cutbacks on the part of OPEC member states. Taking stock/concluding thoughts The OPEC agreement in our minds represents a welcome first step towards the long-awaited rebalancing of the global oil market. Indeed, all other things being equal, even if there’s just 50% compliance to the agreed OPEC cuts, we still envision the overhang of excess supply – which amounts to a figure approaching 0.5m b/d – to be cleared during the course of next year. Despite this, the agreement, as presently constituted, is not a game changer for OPEC member states as there are many other moving parts that also need to be taken into account. Of particular note here is the fact a number of OPEC member states, notably Nigeria and Libya, are exempt from the production agreement and if these countries were to increase their combined oil production by some 0.6m b/d that would go some way towards undermining any cutbacks which are carried out by other OPEC member states. Additionally, of the OPEC countries that are formally subject to proposed production cuts, the position of Iraq and Iran is also noteworthy. Iraq is currently slated to cut production by 0.2m b/d, but given its rather precarious economic and security situation, we are doubtful whether it will actually be able to make the cuts. Similarly, with Iran’s economy – notwithstanding the partial lifting of sanctions – struggling to normalise, coupled with the fact that its government is engaged in various proxy 5 6 7 8 9 10 0 500 1000 1500 2000 2500 10 11 12 13 14 15 16 Rig Count (left axis) Crude production (m b/d, right axis) Chart 6: US rig count vs. oil production (Year) (Source) Macrobond, BTMU Economic Research Office
  6. 6. Special Report | December 20166 wars in the Middle East, it will have little incentive to limit its oil output at the agreed level of 3.8m b/d and we suspect that the country will further strive to return to reach its pre-sanction level of output, which peaked at around 4m b/d. Outside the OPEC countries, despite the agreement with the likes of Russia, we suspect that global oil production will continue to rise apace with new fields in countries such as Brazil, Canada and Kazakhstan expected to come on-stream over the next 12 months. Over and above this, with the latest rally in oil prices, we expect some shale plays that have been mothballed during the oil price rout to re-enter market and this, coupled with the likelihood of more energy friendly policies under a Trump administration, will likely see a step-up in US oil production going forward. A final point worth noting here is that while the announcement of the OPEC cuts has solicited a positive market response, oil prices at today’s level are still well short of the US$75/b or so mark which, on average, MENA based OPEC countries need to ultimately balance their budgets. However, to reach such a level Saudi Arabia, as the de-facto leader of OPEC, would need to consider cuts upwards of 1m b/d and to hold it down for a year or more. Indeed, that is precisely what it would have done in the past in recognition of its role as the world’s “swing producer”. That said, in today’s world, given the difficult economic and security backdrop that the country faces, it unlikely to want to go down this road for fear of further losing market share to its rivals. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”) is a limited liability stock company incorporated in Japan and registered in the Tokyo Legal Affairs Bureau (company no. 0100-01-008846). BTMU’s head office is at 7-1 Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100-8388, Japan. BTMU’s London branch is registered as a UK establishment in the UK register of companies (registered no. BR002013). BTMU is authorised and regulated by the Japanese Financial Services Agency. BTMU’s London branch is authorised by the Prudential Regulation Authority (FCA/PRA no. 139189) and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of BTMU London branch’s regulation by the Prudential Regulation Authority are available from us on request. This report shall not be construed as solicitation to take any action such as purchasing/selling/investing in financial market products. In taking any action, each reader is requested to act on the basis of his or her own judgment. This report is based on information believed to be reliable, but we do not guarantee, and do not accept any liability whatsoever for, its accuracy and we accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. The contents of the report may be revised without advance notice. Also, this report is a literary work protected by copyright. No part of this report may be reproduced in any form without express statement of its source. The Bank of Tokyo-Mitsubishi UFJ, Ltd. retains copyright to this report and no part of this report may be reproduced or re-distributed without the written permission of The Bank of Tokyo-Mitsubishi UFJ, Ltd. The Bank of Tokyo-Mitsubishi UFJ, Ltd. expressly prohibits the re-distribution of this report to Retail Customers, via the internet or otherwise and The Bank of Tokyo-Mitsubishi UFJ, Ltd., its subsidiaries or affiliates accept no liability whatsoever o any third parties resulting from such re-distribution.

Aferthoughts on the OPEC agreement

Views

Total views

153

On Slideshare

0

From embeds

0

Number of embeds

9

Actions

Downloads

1

Shares

0

Comments

0

Likes

0

×