Energy Monitor November – Oil price rally delayed

by: Hans van Cleef

  • Oil price forecast revised lower (Brent: USD 50/bbl year-end 2016, USD 60/bbl year-end 2017)
  • Outcome OPEC meeting end of November remains uncertain; oversupply to remain somewhat longer?
  • Gas- and electricity prices elevated due to supply constraints
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Oil price forecast revised lower

We revised our oil price forecasts lower. In recent weeks, the oil price already fell under pressure due to several reasons. First, uncertainty increased surrounding OPEC’s intention to cut its crude production to ‘only’ 32.5/33.0 mb/d at its official meeting on 30 November. Second, the US dollar appreciated significantly. Third, the US crude oil industry seems to benefit from the election of Donald Trump as the next US President. This may keep the oversupply in the oil markets in place for somewhat longer.

OPEC uncertainty

Ahead of the OPEC meeting in Vienna on 30 November, many oil producing countries have increased their oil production. Possibly trying to position themselves for the negotiation on how to implement and divide the intended production cut among OPEC’s members. Although reaching a successful deal is not impossible yet, the higher production levels do not facilitate the upcoming negotiations.

We estimate the possibility of an actual OPEC production cut as 50-50. On one hand side, several OPEC countries, including Libya, Nigeria, Venezuela, Iraq and Iran indicated that they are not intending to lower oil production for several reasons. Perhaps even Saudi Arabia has some mixed feelings about cutting oil production for economic reasons. However, after the failure of the Qatar meeting earlier this year, the new Saudi oil Minister would like to show the market that OPEC / Saudi Arabia is still in control and is willing to stabilise the oil markets. Nevertheless, the proposed 32.5/33.0 mb/d production ceiling is significantly higher than the previous ceiling at 31.5 mb/d. So, even if OPEC members can agree on a production ceiling at 32.5 mb/d, it basically formalises the rise of OPEC production seen during the first half of 2016. This fits a scenario in which the global demand for oil continues to rise, as long as the net oil production in non-OPEC countries remain flat or lower.

There is a possibility that OPEC surprises the market with a (bigger than expected) production cut. In fact, at this point, any type of agreement would surprise the market. And if OPEC would stick to its intention to set its production ceiling at 32.5 mb/d (or even lower), market optimism will likely pick up, which could be supportive for oil prices. However, such a scenario does not seem very likely, and even if such a deal would be reached, we expect the effects to be only temporary. After all, the relative level of OPEC production will remain around record levels. Furthermore, global inventories are still high. Finally, global demand is only changing slowly (moderate gains), and so is global supply (drop in production of non-OPEC countries is not as strong as expected). The effects on oil prices would therefore be limited, as long as speculative investors will not go long massively.

The Trump effect

The other uncertain factor is the development of US crude production after the election of Trump. Although this coincides with a lot of uncertainties about future policy, Trump does seem to be an advocate of the traditional US energy sector. By de-regulation and lowering tax rates, a faster than expected recovery of the US crude sector could lead to higher supply. Furthermore, Trump seems not to back up the recent global climate deal and could even obstruct recent agreements. This can be seen as a positive for the traditional energy sector.

Whether more crude production would put pressure on oil prices can be questioned. Although still uncertain, the US economy could benefit from Trumps’ intended measures which ultimately would result in higher crude demand. Furthermore, we expect rates to rise, which would be a negative for the capital intensive US crude sector. You can even question whether the US crude production would rise as fast as markets fear. Also important is the OPEC reaction to such a development. Do they stick to their ambition to support higher oil prices? Or does the attention shift again towards maintaining (OPEC) market share? Higher US crude production does not have to lead to a further frustration of the supply/demand balance. After all, outside the US, oil production could fall under further pressure as a result of a lack of investments in the sector. We expect these investments to remain low during the coming years. Therefore, the market may even be heading towards a situation of oil shortages if it was not for higher US crude production. Finally, the election of Trump leads to a stronger US dollar due to the expected boosts for the US economy, but also due to increased uncertainty about the outcome of several European elections scheduled for next year.

It is too early to judge the possible consequences on Trumps’ elections regarding geopolitical developments. The relationship between the US and several large oil producers in the Middle East can change. This may have an impact on the situation in Syria, Libya and Iraq, and therefore also on the oil production in these countries. Another potential risk is the possible implications on the existing Iran-deal. If Iran would be faced again with new US sanctions, it could affect Iranian crude production.

All these uncertainties are pointing to the direction of an extended period of oversupply in the market. Higher yields in the US, a cap on global production growth and the continuous growth of crude demand however, will bring the supply/demand towards an equilibrium in the course of 2017. Therefore, we maintain our forecast of a higher oil price in 2017 and 2018. Nevertheless, we expect the oil price recovery to take somewhat longer (peak in 2018) than we initially expected, and will be less strong than anticipated earlier. See Table 1 for our new price forecasts.

Prices of gas and electricity found support in France

Recently, prices of coal, gas and electricity gained significantly as a result of supply related issues in France. Due to a series of unexpected closures of French nuclear power plants, uncertainty rose about a possible shortage on the European power market this winter. The company of Électricité de France (EDF), owner of the French nuclear power plants, was forced by the French Autorité de Sûreté Nucléaire, or ASN, to close 20 of its 58 reactors for maintenance and/or inspection. The power production dropped to the lowest level in 18 year according to the power provider RTE. And although EDF indicates that it can restart most of these power plants before the end of the year, the market is less convinced. As a result, France would be forced to import a significant amount of power from surrounding countries, mainly Germany. And since Germany is coping with a period of relatively limited wind power in the Northern part of the country, most of this power must come from the German coal plants. A rising demand for coal and gas triggers a higher carbon price, which is translated into a higher power price as well.

Due to recent developments, we have increased our TTF gas price forecast. The TTF spot price rallied almost 70% since mid-August. Although supply will likely normalize in the coming months, (seasonal-) demand will rise as well. Therefore, we expect that the TTF gas price will remain trading around current level of EUR 18/MWh for the coming months. In the course of 2017, prices may resume it downtrend again. Please see table 1 for our new forecasts.