Thursday May 25, 2017

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Oil & Minerals
Week Ahead

Rebalancing acts

Opec meets to get the oil market under its control

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On Thursday, May 25, representatives from Opec meet in Vienna. On the agenda is whether to extend production cuts agreed by members of the oil producers’ cartel and other oil-producing countries in November.

The aim of the 1.8 million barrel per day cut, which came into effect on January 1, was to lift the price of oil over $60. The immediate results were promising: prices rose above $50 in short order; moreover, members of the bloc showed uncommon discipline in sticking with the agreement.

That the measure did not push prices up to the desired level underscores that Opec – despite still producing half of the world’s oil and sitting on three quarters of its reserves – no longer has an outsize say when it comes to oil prices.

SEE RELATED: Slip slidin’ away

Part of the problem for Opec is that less oil is being consumed. According to the International Energy Agency, which tracks energy issues, inventories in industrialised countries are above their five-year average, a statistic Opec pays attention to when setting production levels.

Perhaps more worrisome is that growth in global demand declined for second year running this year, according to the IAEA. Increasing investment in renewable energy production, including wind and solar, is likely to see this trend continue.

In the past, the standard response to falling demand would be further production cuts. ‘Balancing the market’, as the measure is known, seeks to ensure stable prices and a balance between supply and demand.

In the age of unconventional oil, such harmony can prove elusive. As prices rose on the back of the price cut, non-Opec producers, primarily US shale producers, stepped up production to take advantage of the higher price.

SEE RELATED: Editor’s Briefing | Victory in the Arctic

Where does Arctic oil in all of this? If it is true that the market’s real rebalance involves decreased demand and prices well below the $100/barrel oil was fetching at its peak three years ago, analysts suggest the hard-to-reach corners of the region will remain unfeasible for the short term.

That would rule out places like offshore Alaska and north-eastern Greenland, which are far from shore and even further from infrastructure of any sort.

Norway and Russia, on the other hand, remain bullish on their prospects. Thanks to their location in a region of less sea ice and shallower water, their blend of Arctic oil is easier to get at. Rosneft, a Russian producer, reckons, the region could account for as much as 30% of the country’s output by 2050.

Norway, for its part, is in the midst of its largest Barents Sea licencing round ever. Its hope is that ramped-up activity there will compensate for declining North Sea output. A rebalance of their own.

Photo: Eni Norway