Energy

OPEC puts floor under oil prices

November 30, 2016
Ivy Energy Fund

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Story Highlights

  • We think OPEC effectively has put a floor under crude oil prices at about $50 per barrel.
  • We believe oil could reach the mid to high $60s in 2017.
  • OPEC’s decision signals oil producers to get moving to meet supply needs in 2018-20.

The agreement by the Organization of Petroleum Exporting Countries (OPEC) to reduce production quotas is an important demonstration that member countries may again be willing to act in concert when it comes to the oil market. OPEC will reduce production by 1.2 million barrels per day (bpd) to a total of 32.5 million, a meaningful reduction in supply.

OPEC announced in September that it would reduce output to a range of 32.5-33.5 million bpd – the first production cut in eight years – but delayed a final agreement until the meeting this week.

Oil prices had begun to edge higher in anticipation of the meeting after Russia met with Saudi Arabia prior to the full OPEC meeting and noted it was ready to work with OPEC's ultimate decision. A number of officials in OPEC-member countries also reportedly attended informal, often bilateral meetings in the run-up to the meeting to try to build a consensus on the decisions made in September.

We think the latest decision means OPEC effectively has put a floor under crude oil prices at about $50 per barrel. We believe the market is in balance and this will allow current high inventory numbers to fall more quickly. Looking ahead, we think the price could reach the mid to high $60s in 2017.

Global oil demand has continued to grow and may increase by 1.2 million bpd in 2017 on top of the current total of 95 million bpd, with the increase driven mostly by emerging markets. We believe new investment by energy companies will be needed to meet supply requirements in the coming years, and higher oil prices will be required to attract this new investment.

In our view, OPEC’s latest decision is a signal that oil producers need to get projects moving again to meet supply requirements in 2018-2020, reflecting the cost cuts and stoppages that followed the dramatic price drop of November 2014. Capital spending has been cut by 50% in the last two years and hundreds of thousands of workers have been laid off. Discoveries of new oil reserves totaled 2.8 billion barrels worldwide in 2015, the lowest annual volume since 1954.* We believe the industry needs higher prices and time to get spending going on projects again and bring back jobs.

Finally, we still believe U.S. shale oil offers opportunities, with much of our focus remaining on the Permian Basin for production growth. Companies there continue to improve efficiency and productivity, and are managing costs effectively.

* Source: Financial Times, “Oil discoveries slump to 60-year low,” May 8, 2016

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