Despite the buzz generated by news of OPEC’s upcoming 1.2M bpd production cuts, there was one other piece of news that emerged from the latest meeting in Vienna: Indonesia has suspended its membership of OPEC, again. With reprieves from the production cuts given to Libya and Nigeria, and Iran permitted to continue growing its production, much of the burden falls to Saudi Arabia with its cut of around 500k bpd. Falling three days short of a full calendar year in the organisation, Indonesia’s departure saw its 722k bpd production allocation distributed among the remaining OPEC nations; a redistribution that would undoubtedly softened the blow for many of the OPEC members.
"As the sole Asian member – a region which is known viewed as a destination location in the energy value chain – and as the only net-importer of oil and refined products, Indonesia’s position in OPEC has always been a paradoxical one. Facing a call to cut its production has placed Indonesia in a lose-lose dilemma: any medium- to long-term revenue implications from a reduction in production would be immediately exacerbated by a surge in the nation’s energy import costs, considering Indonesia’s position as a net oil importer."
– Oliver Hsieh, Director, Commodity & Energy Risk Management, KPMG in Singapore
The announcement from OPEC of a headline cut to 32.5 million bpd for Q1-Q2 2017, which included production targets for members other than Nigeria, Libya, and Indonesia, will fail to deliver an actual OPEC production total of 32.5 million bpd for Q1 2017. More probable is a total around 33.0 million bpd. This will sharply reduce the pace of inventory accumulation in Q1 2017, but will not lead to inventory draws until Q2. Given the rock solid credibility of the Saudi/GCC portion of the cuts, this will clearly put a floor under prices and provide OPEC producers with some respite from their financial difficulties. We are very sceptical of non-OPEC pledges of cooperation, including Russia’s, given the lack of successful precedent. Russia will at most make token cuts, which would not materialize quickly in Q1 2017. This leaves crude oil prices likely to stay in the lower $50s through early 2017, rising into the upper $50s in the second half, even as OPEC production probably begins to track back up, either through declining compliance or through a rollback of the cuts, which are primarily intended to prevent a price drop during the low refiner demand season in the first half of the year.
– Greg Priddy, Director, O&G, Eurasia Group
In the second half of 2016 we had started to see a convergence on long term outlook on oil prices from buyers and sellers and this, along with more innovative deal structures had kick started deal flow in the North Sea. As a result of the OPEC announcement, oil prices have risen, however the announcement is likely to bring divergence back into longer term views on pricing. Buyers are likely to have an amount of scepticism over the reality of the production cuts, both from OPEC producers and non OPEC producers, with sellers asking for increased pricing assumptions due to the perceived oil price floor.
"It is expected that if prices stabilise at around $55/bbl for a number of months that US tight oil drilling will start up again, which would offset reducing supply from other countries. For the North Sea, deal activity will likely increase given the short/medium term pricing floor, and it is likely that oil price earn outs will become more commonplace."
– Natalie Wansbury, Associate Director, Oil & Gas Practice, KPMG in the UK
Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.
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