Mriganka Jaipuriyar
AS we enter the final paces of the first quarter of 2018, international crude prices seem to be trading firmly above US$60 per barrel, although they have taken a dive from the multi-year highs seen just a couple of months ago.
OPEC-led production controls are quite the norm now, ever since a key group of producers including OPEC and others put in place the supply cut agreement in December 2016. This year so far has been a validation of their efforts, with the two international benchmarks: front-month ICE Brent futures and NYMEX light sweet crude oil averaging US$67/b and US$62.68/b, respectively, since the start of the year.
“Everybody benefited,” OPEC Secretary-General Mohammed Barkindo said at a recent industry conference, adding that the agreement put the industry back on a “path of sustainable growth.”
The impact can be seen across oil price forecasts generated by industry experts. Where record crude oil inventories just a year ago made the likelihood of $60/b-$70/b oil a pipedream, analysts this year are far more bullish.
Goldman Sachs analysts in their Commodities Research report said: “Combined with our expectation for strong oil demand growth and high OPEC compliance, we reiterate our constructive forecast on oil prices with global inventories set to fall further below their 5-year average levels through Q3 2018.”
Similarly, analysts from Societe Generale in a report Wednesday forecast front-month ICE Brent prices to be US$67/b in Q2 2018 and US$68/b in Q3 2018.
While this carefully monitored effort to curb global oil production and exports has received credence from initially skeptical industry analysts, the spotlight now shifts to US energy policy.
In the context of worldwide producer cuts giving a leg up to oil prices, US producers have come back from the brink of a challenging financial phase for the drilling industry, with the country’s production crossing the 10 million b/d mark in a record-setting November last year, up from 8.77 million b/d in November 2016.
Output has stabilized a bit since then. According to Baker Hughes, the US rig count -- an early indicator of future crude oil production -- fell 4 to 796 in the week to last Friday, the first such fall in seven weeks. Meanwhile, analysts expect US crude inventories to see a build of 2.5 million barrels for the week ended March 9, and preliminary data from the American Petroleum Institute shows a possible build of 1.2 million barrels for the same.
But domestic oil production is not the only way the US may impact global oil winds this year. The fresh dismissal of US Secretary of State Rex Tillerson by President Donald Trump puts the industry into a new flux, reviving the question of whether the US will reimpose sanctions on Iran.
Trump named CIA Director Mike Pompeo, a former Republican congressman from Kansas and a harsh critic of the Iran deal, as Tillerson’s replacement, which industry watchers say makes sanctions a high possibility.
“I think we can now safely say that the end is near for the Iran deal,” Joe McMonigle, an analyst with Hedgeye Capital.
“Should sanctions be re-introduced against Iran, versus the previous lifting of the said sanctions, as long as Tehran limited its nuclear energy program, it could raise the geopolitical risk premium in oil markets,” OCBC analyst Barnabas Gan said after the news.
May 12 is the next deadline for the US to waive oil-related sanctions on Tehran as part of the Joint Comprehensive Plan of Action.
Iran, meanwhile, is not wasting any time. It has been vocal about pushing its production past current OPEC limitations based on the suppressed output it had to endure during the previous phase of sanctions.
Iranian oil minister Bijan Zanganeh argues higher prices are reviving US shale at OPEC’s expense. In a recent interview with The Wall Street Journal, he said the 14-member group may agree at its next meeting June 22 on a strategy for ending its cuts starting in 2019. Zanganeh insists Saudi is onboard with the idea, but his message contradicts recent signals of longer term cooperation between OPEC and producers outside the group led by Russia.
The next opportunity for OPEC and its partners in the production cut agreement to discuss policy comes next week when a six-country technical committee overseeing the deal meets to discuss market conditions. Iran isn’t part of the committee.
OPEC as a whole is 340,000 b/d below its notional ceiling of about 32.73 million b/d, when every country’s quota under its production cut agreement is added up, according to the latest Platts OPEC survey.
Mriganka Jaipuriyar is associate editorial director, Asia and Middle East oil news & analysis of S&P Global Platts.
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