OPEC supply cut taking 1.8 million b/d out of market
On Monday, Saudi Arabia’s oil minister Khalid al-Falih said oil producers would “do whatever it takes” to reign in the global crude glut and hinted that the OPEC supply cut pact will likely be extended to the end of 2017, and perhaps longer.
“Based on consultations that I’ve had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond,” Saudi Oil Minister Khalid al-Falih told Reuters at an industry event in Kuala Lumpur.
“The producer coalition is determined to do whatever it takes to achieve our target of bringing stock levels back to the five-year average,” he said.
Falih said the oil market is still out of balance due to seasonal low demand, refinery maintenance and increased production by non-OPEC countries, especially the United States.
Oil production in the US has grown by more than 10 per cent since the middle of last year, and now sits at 9.3 million b/d, close to the levels of Russia and Saudi Arabia.
Despite the higher US production, Falih said markets have improved from the lows of 2016 when crude prices were below $30/barrel.
“I believe the worst is now behind us with multiple leading indicators showing that supply-demand balances are in deficit and the market is moving towards rebalancing,” he said.
“We should expect healthier markets going forward.”
Falih says global crude demand is growing and will likely continue at a pace close to 2016. Oil demand in China is expected to match last year’s thanks to the transport sector and analysts expect record healthy growth in India.
According to Falih, almost all of the expected oil demand growth in the coming 25 years is likely to come from Asia as the region’s population grows and countries like Vietnam and the Philippines rise into the ranks of the top 20 global economies.
Asia is also expected to account for nearly two-thirds of global gas demand in the coming 25 years.
Low crude prices have also resulted in reduced global investments in exploration and production which could produce a big supply-demand gap in the coming years, said Falih.
“Conservative estimates predict that we will need to offset 20 million barrels per day in combined demand growth and natural decline over the next five years,” Falih said.
“That is why I fear … we are heading into a future of supply-demand imbalances.”
Reuters reports that OPEC and industry sources say discussions about extending the OPEC supply cut into the first quarter of 2018 have occurred.
Fereidun Fesharaki, chairman of energy consultancy FGE told Reuters: “They (OPEC) are looking at (extending) for nine to 12 months. Six months is not enough as we’ll still be well above five years average of stocks.”
As far as the alternative energy replacing fossil fuel consumption, Falih said renewables still faced hurdles such as affordability.
