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Oil continues to hold sway over global economy
November 25, 2017, 3:04 pm
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With benchmark Brent crude prices hovering around $62 per barrel in late November, oil looks set to round off a fifth consecutive month of gains. November’s price also marks the first full month since 2014 that Brent has remained over the $60 barrier. From its mid-January 2016 low of $29 per barrel, Brent has been on a rising trajectory, more than doubling in the nearly two years. Meanwhile, West Texas Intermediate (WTI), another international oil benchmark, ranged close to its highest level in 2017 at $57 per barrel.

Among the reasons cited for the rise in oil prices are a growth in demand from a global economy gaining momentum and persistent geopolitical risks. But central to the bullish sentiment on oil is probably the successful strategy adopted by several OPEC and non-OPEC members to cut production in a bid to trim oil surplus inventories worldwide. Uncharacteristically, the oil producers have managed to remain compliant with their decision on production cuts for 10 straight months since its implementation from January of this year. 

The rare display of unity in removing excess oil from the market has been further buoyed by recent remarks from top OPEC sources. The oil-cartel has hinted that the production cut agreement, which was set to end in March 2018, could be extended to end of next year. OPEC is scheduled to meet at their headquarters in Vienna on 30 November to make a call on this and other related matters.

OPEC crude supply in September 2017 stood at 32.75mbd (million barrels per day), down nearly 2 percent from the 33.39mbd in September 2016. Meanwhile, commercial crude and product inventories have also been seen to fall worldwide. Among the 35-nation Organization for Economic Cooperation and Development (OECD) bloc stocks have been declining since their peak in July 2016.

According to the OPEC Monthly Oil Movement Report (MOMR), inventories of the OECD bloc were down to 2.996 billion barrels in August, a fall of 3.5 percent (98 million barrels) from the 3.094 billion barrels a year earlier. Despite August 2017 levels bringing OPEC close to its five-year average target level of 2.825 billion barrels, the fact is much of this reduction reflects the target level, which is a rolling average.

For its part, the International Monetary Fund (IMF) in its ‘World Economic Report’ in October noted that the global upswing in economic activity is strengthening, with global growth projected to rise to 3.6 percent in 2017 and 3.7 percent in 2018. Reflecting this global growth, the International Energy Agency (IEA) has revised its assessment of global demand for crude, now maintaining that demand could significantly outstrip supply by the end of 2017.

The IEA has pegged demand growth in 2017 at 1.6mbd, which, if OPEC maintains its production-cut supplies at current levels, could mean a gap of 1.3mbd over expected global supply growth. Global stocks are expected by year end to be drawn down by 130 million barrels.

However, the IEA report added that the scenario could change dramatically in 2018, when supply growth is projected to outstrip demand growth. The agency projects demand growth of 1.4mbd and non-OPEC supply growth of 1.5mbd, with the United States expected to be the largest contributor to non-OPEC supply growth, with as much as 1.1mbd of crude oil coming on stream.

Meanwhile, the latest weekly report from the National Bank of Kuwait (NBK) points out that oil prices posted their first week-on-week decline in almost five weeks on 17 November, with Brent closing down 1.3 percent to $62.7 per barrel and WTI down 0.3 percent to $56.5 per barrel. Prices were under pressure for most of the week on reports that Russia was hesitant to commit to an extension of its output cut agreement with OPEC and preferred to wait until March 2018 before making a decision. Market despondency was also fueled by latest US petroleum data, which showed crude production hitting another shale-era high last week at 9.65mbd.

In its most recent ‘World Investment Report 2040’, the IEA predicts that total US crude and refined products output could likely reach 16.9mbd by 2025, with shale surging by a further 34 percent to reach 9mbd by 2025. These figures will make the US the “undisputed global oil and gas leader for decades to come, surpassing Saudi Arabia and Russia,” remarked an Executive Director of IEA, last week.

US shale output will, however, begin to decline after the middle of the next decade, which will see OPEC increasing its market share of the total crude and petroleum liquids market to 46 percent by 2040 from the current 43 percent. However, the growing elephant in the room that most analysts seem to discount is renewable energy. As it becomes increasingly efficacious and cost-effective, adoption of sustainable energy by various sectors of the economy could pose a formidable challenge to conventional energy.

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