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In a landmark deal, OPEC members agreed last week to cut oil production by 4.5 percent. As part of the deal to help support the global oil market, non-OPEC members plan to cut production by 600,000 b/d next year. Brent crude oil prices rose above $55 a barrel on Monday, trading at a new 16-month high.
Anas Al Hajji, oil expert and former chief economist at US-based NGP Energy Capital Management in Texas, tells Argaam that Saudi Arabia’s level of output will be crucial to the deal, along with the commitment of other producers to the agreement. He also believes that anticipated policies coming from U.S. President-elect Donald Trump may help support the oil market.
Q: What do you think of the outcome of OPEC’s meeting?
A: Reaching an agreement was unexpected, but in the end the most important thing, is commitment to the agreement. Oil prices remain around $50/barrel, a level we’ve reached before without an output cut.
Q: You said that OPEC was dead a few months ago; do you think OPEC is sending a message that it is still relevant?
A: The agreement doesn’t mean that OPEC is back from the dead. It simply means that Saudi Arabia restored its historic role as a swing producer capable of balancing the market when needed. Saudi Arabia, and to some extent other Gulf states, will make the biggest cuts.
The same challenges, however, still remain. In the long-term, challenges like the privatization of Saudi Aramco and the increasing competition in the field of oil products will arise.
Q: Can you explain why Saudi Arabia will have to undertake the biggest output cuts?
A: Saudi Arabia is OPEC’s biggest producer and it’s normal that it will cut the biggest share from the overall 4.5 percent cuts.
Saudi Arabia has previously increased production by a million barrels a day. The new cuts are taken from excess output and not from the 9.5 million b/d it produces.
Q: Did Iran come out a winner from this agreement as its production remains at 4 million barrels per day? Do you think it will honor the production agreement?
A: Iran has reached its maximum production capacity or near maximum, so it’s irrelevant for now. Saudi Arabia’s Vision 2030 requires the kingdom’s focus to implement all of its aspects, and Iran has wasted so much of the country’s time during OPEC talks. Neutralizing Iran in OPEC was important, even if the agreement meant that Tehran would reach its goals.
If oil is higher by just one dollar, it means that Saudi Arabia is making additional $10 million a day, while Iran is making $4 million. If there was no agreement, that income would have been lost.
Q: Do you think the production cuts will help end the global glut?
A: There is a huge oversupply in the market. I expect the actual cuts to be between 300,000 to 700,000 b/d. That will be enough to balance prices. An actual production cut of 700,000 b/d will be enough to gradually reduce inventory and balance the market by mid-2017.
Though Libya and Nigeria were exempted from the production cuts, it’s possible they won’t be able to resume production as planned.
Q: OPEC’s commitment to production cuts has been historically unreliable; do you think this time will be different?
A: The key issue is Saudi Arabia’s commitment to the cuts.
Q: Do you think Russia will be able to force its companies to cut production?
A: I don’t think Russia will voluntarily cut production because it has requested a total commitment from OPEC, and this won’t happen. Any production cuts from Russia will be a result of technical or maintenance reasons.
Q: What is the impact of the agreement on prices?
A: Production cuts prevent prices from deteriorating further, generally speaking. If the cuts were bigger than I expected, then prices will be higher in the next few months. Lack of investment in exploration and production in the past two years will have an impact on the global market in the next three years, which will support prices.
An actual cut of 300,000 b/d will help increase oil prices to $53 to $56 a barrel. Higher cuts will lead to higher prices.
Q: The U.S. shale oil seems to be a winner of that agreement, without having to commit to anything. What do you think the major producers should do?
A: It’s hard to say that shale oil is the winner. It was the biggest loser after the oil price collapse. Saudi Arabia’s policy managed to limit the expansion of the shale oil, and not it can control its growth in accordance with the growth in global oil demand. Saudi Arabia’s target was not to kill off shale oil, but mainly to control its growth so that it doesn’t affect OPEC members’ market share.
Q: What will be the impact of Trump’s policies on energy in the GCC region?
A: He is expected to approve the building of the Keystone pipeline from Canada within two weeks from assuming power. The pipeline will carry 800,000 barrels of Canadian oil, which is very similar to the oil imported from Saudi Arabia, Kuwait, and Iraq that the U.S refineries in the Gulf of Mexico process. The markets are still waiting for his decision on the nuclear deal with Iran, if sanctions were resumed, Iranian output could drop a little, but all its expansion and upgrading of oil facilities would be destroyed.
Q: What do you think of recent reports that indicate that global oil demand will peak in the near future?
A: This theory is supported by many facts, but the reality is millions of people are expected to come out of poverty, which will spike demand for transportation and energy in general. Demand growth for oil might be slower than other energy resources, but it will continue to grow.
Such reports ignore consumers’ reaction to lower energy costs and the improved efficiency in general. The reports also exaggerate the growth in electric and hybrid cars usage. If Trump stops subsidies for the electric cars industry or ethanol mix usage, then demand for car fuel will be bigger than expected in the U.S, the world’s biggest oil market.
Q: U.S. companies added more than 160 exploration oil rigs in the past 7 months. Do you think the OPEC agreement will help spur demand for drilling, especially in the U.S.?
A: It depends on prices. If prices remained under $55/b, then the increase in oil rigs will be limited to West Texas oil fields. If average price is over $60/b, we will see more rigs in other areas like Eagle Ford and Bakken.
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