Platts: Oil stock overhang could disappear by 3Q 2017

With 2016 behind us, energy intelligence groups have begun dishing out their takes on the energy sector for 2017.

One of them, S&P Global Platts, an independent provider of information and benchmark prices for the commodities and energy markets, has shared its view on what to watch this year when it comes to oil market.

In its forecast on Friday, Platts says that the recent OPEC-led global production cut – first in 15 years -underpins an emerging but fragile recovery, with 2017 set to see a huge stock overhang disappear by the third quarter and the oil market move from over-supply to a more balanced supply/demand situation.

Great deal of optimism

With Saudi Arabia and Russia joining forces to cut production by almost 800,000 barrels a day in the first half of 2017, and other oil producers under pressure to comply with their share of cuts to bring the total close to 1.8 million b/d, there remains a great deal of optimism in some quarters that the pace of rebalancing will be accelerated; in others there is skepticism that OPEC and its non-OPEC associates can really deliver, the intelligence group added.

However, Platts has pointed out that the pace of the rebalancing of the oil market will also depend on the discipline to enforce and maintain the cuts across “a disparate group” of oil producers, especially with “crisis-ravaged” OPEC members Libya and Nigeria exempted from the agreement, but with the potential to see large additions in output.

Opec=Floor/Shale=Ceiling

Moreover, Platts said, the speed of return by US shale producers could ultimately keep a lid on prices. Most oil companies appear generally optimistic that prices will rise to a more sustainable level in 2017, but spending is likely to stay modest for now and production growth moderate. Caution is likely to dominate the North Sea oil industry, with a mini-revival in production in the last two years juxtaposed against years of decline since production peaked in 1999, Platts said.

Paul Hickin, Oil Editorial Director, S&P Global Platts: “The next few years will be shaped by the relationship between US shale and OPEC, Russia and other key oil producers. This landmark agreement between OPEC and non-OPEC is providing a floor to oil prices and US shale is providing the ceiling. Compliance to the deal until the stock overhang disappears, most likely by the third quarter of 2017, according to Platts estimates, will be pivotal to ensuring the price floor holds, while the speed of return of US shale will determine how low the ceiling becomes.”

Marked increase for U.S. exports

Reflecting large production cost reductions and productivity gains, Platts Well Economics Analyzer estimates that if US crude benchmark West Texas Intermediate reaches $65/b, leading US production areas have an internal rate of return of between 35 and 40%. The Permian Basin could be the biggest beneficiary of expected double-digit increases in capital budgets in 2017. Platts Analytics forecasts that production in the West Texas/New Mexico basin will reach 2.226 million b/d in 2017 up from slightly below 2 million b/d in 2016.

“An increase in US crude production and a wider WTI-Brent spread since the end of 2016 are raising hopes that 2017 will be the year when US crude exports see a marked increase.” Platts said.

Also, the energy intelligence group forecasts that, for the third year in a row, India’s oil demand growth will outpace China’s. Platts Analytics is forecasting a 7% rise to 4.13 million b/d in Indian oil demand in 2017, compared with a 3% rise in Chinese oil demand to 11.50 million b/d.