Sector
update:
Regional Oil & Gas (Neutral)
Rumblings Of Institutionalising Co-Operation
Regional Oil & Gas (Neutral)
Rumblings Of Institutionalising Co-Operation
The
OPEC-Russia Energy Dialogue discussed the possibility of institutionalising the
co-operation between OPEC and non-OPEC members. This would ultimately result in
a sustained partnership over the longer term. Should this happen, it would
address our earlier concerns about a potentially challenging 2018. We had
earlier premised that production cuts may need to be more of a permanent
fixture, in light of possible higher production in the later part of 2018. We
believe that the institutionalisation of the co-operation would be positive as
producers are looking for a longer-term solution to an oversupplied market. Our
crude oil price forecast is unchanged (USD60/bbl for 2017/2018). NEUTRAL sector
call is maintained.
¨ Institutionalising OPEC and non-OPEC co-operation?
Russia
and Saudi Arabia are currently discussing the possibility of institutionalising
their co-operation beyond 1Q18, after the end of the nine-month production cut
extension. To expand on what this means, Russian Energy Minister, Alexander
Novak said that he is looking to work out new framework principles jointly with
the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC nations
to continue steady co-operation even after the current output deal expires,
according to Reuters.
OPEC and non-OPEC ministers are looking to
put in place co-operation and collaboration that would continue after the
implementation process. A six-nation committee overseeing the current
production cut agreement would consider proposals to sustain the partnership in
the longer term when it meets again next month. The details would then be
presented to ministers when they meet in November in Vienna.
¨ 2018 could be a challenging year. We mentioned in our
report dated 23 May (Regional Oil & Gas: A Peek Into 2018), that as OPEC and
non-OPEC production cuts end, we expect higher production from OPEC, Russia,
US, Canada and Brazil. Additional supply in 2018 is expected to reach 1.9mbpd,
against additional conservative demand of 1.2mpbd. Thus, an oversupply in 2018
could be 0.7mpbd. We therefore believe that production cuts may need to be more
of a permanent fixture. We think it is possible that producers may have to
revert back to a quota system as without such a mechanism, it is possible that
the markets may collapse again.
¨ A positive move for oil markets in the longer term. We believe the
OPEC-Russia Energy Dialogue, held on 31 May, and subsequent discussions on
institutionalising their co-operation is a move in the right direction, which
would address our concerns above. There are as yet, no details as to how the
new framework would be implemented. However, we believe that such a move should
be viewed as further positive attempts by major oil producers to steer the oil
market towards a stronger and more stable market in the future.
¨ Risk
of higher supply from Libya/Nigeria and US. Libya’s oil production reached
827,000bpd in May, the highest level since 2014. This is still half of its
1.6mbpd production prior to the civil war in 2011. Nigeria is currently
producing c.1.4-1.6mbpd, still far from its 2mbpd potential. US production is
set to reach 9.96mbpd by 2018, up from 9.31mbpd in 2017. The risk of an extra
2mbpd from these countries is possible over the next 12 months, in our view.
Factors that would affect production in Libya and Nigeria include political
unrest, while US production would be affected by price sensitive issues.
Kindly click the following link for the full report: Regional Oil & Gas: Rumblings Of Institutionalising Co-Operation
Best regards,
Kannika Siamwalla,
CFA
Head of Regional Oil
& Gas
RHB Securities
(Thailand) PCL.
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