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Oil experts cautiously optimistic over Saudi oil output cut

4 January 2017
Lulwa Shahloub

Jeddah – Saudi Minister of Energy, Industry and Mineral Resources Khalid Al-Falih’s announcement on Thursday that the Kingdom has reduced its oil output to its lowest levels in two years has created a wave of cautious optimism.

The announcement, made at the Atlantic Council Global Energy Forum in Abu Dhabi, comes 12 days after the official start date of the six-month deal reached by the Organization of Petroleum Exporting Countries (OPEC) in November to cut production in order to curb the fall in oil prices.

Experts say Saudi Arabia has shown commitment to the deal by exceeding its pledge to cut production. Output fell below 10 million barrels per day, Al-Falih said. 

Energy expert and former professor at King Fahd University of Petroleum and Minerals, Mohamed Ramady, told Arab News: 
“The latest comments by… Al-Falih underscores the seriousness by which the Kingdom and other GCC (Gulf Cooperation Council) countries are taking on their commitments to not only meet their production-cut targets, but also exceed them if needed, especially if there’s progress on compliance by May.”

Ramady emphasized the significance of Russia’s commitment to make this deal a success along with Saudi Arabia, which according to him adds a new, positive element that was missing before.

Riyadh-based economist John Sfakianakis said OPEC members, and Saudi Arabia in particular, impress the market by being more than fully compliant by creating a floor in oil prices.

“The commitment of Saudi Arabia and OPEC to lower output is obvious, and will become more so when hard output data are produced in early February,” Sfakianakis, director of economic research at the Gulf Research Center, told Arab News.

“Prices have found support from growing confidence that Saudi Arabia and other members are successfully implementing production cuts.”

Despite optimism in the oil industry after the OPEC deal, some analysts speculate that it may be faced by obstacles if some countries show a lack of commitment.

Ramady said verifiable compliance is central to ensure market confidence that the agreed OPEC and non-OPEC production cuts are met.

“No matter what encouraging statements come out, there will be a credibility gap based on past non-compliance by some countries,” he said.

“This will only delay any real market balancing, and will put a strain on current oil prices, which might also come under pressure given global trade uncertainties following a Trump presidency’s commitment to renegotiate trade agreements.”  

Achieving stability in the oil market is deemed to reflect positively on the economy. Sfakianakis said given the fiscal constraints oil producers are facing, any medium-term rebalancing would be positive.

“The market is in a consolidation pattern, and as we get more and more signs of Saudi Arabia and OPEC implementing cuts, we’ll have another test of $55. The market tries to push higher then wait to see the level of compliance applied.”

Mohammed Al-Sabban, former senior adviser to the minister of petroleum, told Arab News: “Despite the continued improvement in prices in the past week, an extension of the optimism that began with the OPEC agreement at the end of last year, the second active week of the deal witnessed a wave of price fluctuations.”

He added: “Any non-adherence would result in oil prices dropping significantly, probably to levels much below current prices.”

Al-Sabban said prices would range between $55 and $60 per barrel, and the upcoming increase in US shale oil would put a cap on oil prices of not more than $60. He added that $55 would ease the financial pressure facing Saudi Arabia.

Al-Sabban, professor of economics at King Abdulaziz University and a member of the Supreme Economic Council, said fixing prices over $50 is subject to serious monitoring and commitment among oil producers.

In the US, Sfakianakis said, inventories of crude and products last week rose more than anticipated, while a sharp increase in refining production to record highs pointed to solid demand.

© Arab News 2017

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