Strategy_Note_Issue4-NBKC_TheOilMarket-AwatingDemand-May2017

Strategy Note – The Oil Market

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Kuwait: May 17, 2017

The largest oil producers outside of OPEC are Russia, US, China, Canada, and Brazil. Russia on a standalone basis produces oil at an average rate greater than that of KSA

HIGHLIGHTS

  • After the start of the oil price decline in late 2014, traditional oil producers led by OPEC opted to continue their pump-at-will policy in an effort to maintain market share, increase revenue, and drive out high cost producers and ultimately benefit from a price rebound once global demand recovers
  • Fast forward a year and a half later, oil prices continued their decline dipping below USD 30 per barrel by January 2016 with inventory reaching record levels amid sluggish global demand
  • OPEC and non-OPEC countries unable to sustain the status quo came to an agreement in November 2016 to cut production starting in January 2017 by 1.8 million b/d for a period of six months which the market interpreted as a positive step forward and prices quickly rallied to over USD 50pb
  • Despite a record compliance level with the agreement, a large part of the cut was offset by accelerated production by US shale companies. The rig count continued to push upwards and with it the market skepticism that the supply glut would be absorbed resulting in renewed weakness in prices levels
  • As supply numbers showed no sign of the oil market rebalancing, Kuwait led the call for an extension of the November 2016 agreement into the second half of 2017 eventually finding support from KSA and Russia with possible talks of an extension that goes beyond year-end and into Q1 2018
  • Shale producers across the US, many of whom have used the rally earlier in the year to lock-in their sales prices in the derivatives market well into 2018, have adapted to low prices, cutting their production costs through technological advancement and increased operational efficiency becoming less sensitive to low oil prices
  • Market dynamics over the past couple of years is proving that the major part of the problem is on the demand side, and that even though controls on the supply side would help in stabilizing prices in the short term, they are far from effective in the long term. Traditional producers no longer have the upper hand in controlling the market, and until we see a sustained improvement in global energy demand, oil prices will remain weak and vulnerable to short-term market data

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