The oil market has climbed above $65 a barrel for the first time since 2015, boosted by the closure of the UK’s biggest oil pipeline that has cut North Sea supplies at a time when Opec’s output cuts with Russia have already spurred a robust rally in crude prices this year.
Now, as the industry approaches 2018, the outlook remains clouded in uncertainty as supplies, led by a resurgent US shale industry, are forecast to climb sharply while Opec’s alliance with Russia may come under strain as the world’s biggest producers look to eventually bring production back online.
As the oil market awaits 2018, here are the five factors to watch:
1. Forties pipeline system
As the conduit for 40 per cent of oil and gas supplies from the UK North Sea, the shutdown of the 400,000 barrel a day line has forced operators at up to 85 fields to curtail production. While the UK is a relatively small oil producer at the global level, a 400,000 b/d drop in supplies is almost equivalent to how much oil Saudi Arabia, the world’s largest exporter, has been assigned to cut as the de facto leader of Opec.
As North Sea Brent, the international benchmark, is underpinned by supplies from fields affected by the outage, the market has been quick to react. Olivier Jakob at Petromatrix says it was a “serious supply disruption” likely to upend global flows. “The disruption to Forties is not just about missing barrels, it is also about the losing a key component for the main seaborne crude oil benchmark,” Mr Jakob adds.
All eyes will be on how quickly Ineos, the operator, can repair the line, which suffered a small crack on an onshore section just south of Aberdeen. If they can bring it back faster than anticipated, prices may cool off.
2. Demand
The strength of demand growth is a wild card for the oil market at $65 a barrel. In the past three years, since prices tumbled from above $100 a barrel, demand growth has soared as consumers respond to lower prices, helped along by the most widespread economic growth since the financial crisis. It has risen by more than 1.5m b/d on average since 2014, compared with less than 1m when prices were above $100.
But as prices rise there is uncertainty as to whether strong economic growth will be enough to foster consumption growth at the same sort of pace. That will be a factor as Opec and Russia try to keep reducing inventories that swelled during the glut that emerged around mid-2014.
3. Opec and Russia eye an exit strategy
Going into the meeting of global producers in Vienna last month, Russia pushed for guidance on when a pullback in supply curbs could take place. Saudi Arabia said it was “premature” to begin talking about scaling back the 1.8m b/d of output cuts that have helped prices recover from their nadir below $30 a barrel in early 2016.
Yet, in recent days ministers from Gulf countries closely aligned with Riyadh have said the next formal meeting of ministers in June will see producer countries announce an exit plan, even if the curbs continue for longer.
“That does not mean we will exit in June,” Suhail Al-Mazrouei, United Arab Emirates’s energy minister, said on Monday. “That means we will come up with a strategy.” Opec delegates have said the topic has been discussed privately because they do not want to shock the market by returning barrels too quickly.
Traders are now monitoring statements from the Saudi and Russian camps as if the ministers were central bankers offering forward guidance, knowing the countries have barrels in reserve that can quickly come back to the market.
4. Venezuela
Oil output from Venezuela, a founding member of Opec, has been in near freefall as the country wrestles with a financial and political crisis, leading many analysts to highlight it as a major risk to supplies next year.
Output has declined to just 1.8m b/d from above 2.5m b/d at the start of 2016, with their production far lower than stipulated by the country’s target under Opec’s supply restraint plan.
5. Non-Opec supplies
Growing supplies from outside Opec, led by US shale output, remain the biggest question mark for oil traders in 2018. As a relatively new source of production the range of estimates for how much shale can grow at $65 a barrel remains broad, from as little as 500,000 b/d to well above 1m b/d.
In addition, large-scale oil projects in Brazil and Canada that were commissioned during the $100 oil-era are finally set to come on stream, bringing a new source of supply to contend with that could total a combined 500,000 b/d.
Source: FT.com
