Barring an economic recession, 2016 should have been the low for oil prices, believes Rhidoy Rashid, an oil analyst at Energy Aspects, an independent research consultancy specializing in global energy markets.
Rashid believes that as oil demand and supply balances tighten through the course of 2017, after the deal on oil output cut reached by OPEC and non-OPEC oil producers, the prices should recover.
“The forward curve will flatten, and we expect backwardation by late 3Q2017 (barring any supply shocks), after three years of steep contango. Our current price forecasts place Brent at around $65 per barrel by the end of 2Q2017, and prices could rise to as high as $70-75 by the end of this year,” the analyst told Trend by email.
In December 2016 OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices.
Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 bpd starting from Jan. 1, 2017 for six months, extendable for another six months, to take into account prevailing market conditions and prospects.
OPEC agreed to slash the output by 1.2 million barrels per day from Jan. 1, with top exporter Saudi Arabia cutting as much as 486,000 bpd.
Rashid noted that the decision to cut production caught many by surprise late last year. Prices received an immediate boost, although there is still much scepticism about how successfully the group will implement its commitments, according to the expert.
“Certainly, we are not expecting 100 percent compliance from all members, but Saudi Arabia and the other GCC [Gulf] states will follow through on 0.8 mb/d, and other OPEC members should push the total past 80 percent,” he said.
Rashid went on to add that Nigeria and Libya remain wild cards, but Riyadh is ready to cut further if they manage to outperform.
He also noted that in the broader context of the rebalancing cycle, reducing output now, just as inventories have started to edge lower, makes sense as it will put the rebalancing on a firmer footing and ensure an uplift to oil prices.
“The current OPEC agreement is not necessarily a six-month deal to get oil prices up. Of course, prices are widely expected to rise but the underlying objective is to run down the excess stocks,” Rashid said.
So the market should not rule out an extension of this deal in May for another six months, the expert believes.
OPEC countries agreed to cut oil production at the meeting on Nov. 30. On the eve of this meeting on Nov. 29 Brent oil prices hit $44.68 per barrel. On Jan. 6 oil prices rose to $57.1 per barrel.