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From Global Risk Management

The Oil Market Annual Outlook Jan’17


The outlook in less than 60 seconds.... Compared to same time a year ago, oil prices have almost doubled. In our outlook, we give you the main reasons for the steep increase and also our forecast for oil price developments in 2017. 2016 was eventful; Brexit, Presidential elections in the U.S., OPEC + non-OPEC production cut decision have all played major roles in the development of oil prices. Brexit caused financial uncertainty, Trump elected for president from 20 January 2017 gave renewed expectations of growth in the huge economy and OPEC + non-OPEC deals spurred expectations potential supply/demand balance change. 2017 will likely be just as exiting. We will get more insights to the financial actions of Trump, new President of the U.S. We will see if OPEC and non-OPEC “walk the production cut talks”. The compliance/non-compliance of the November deal between many of the world’s largest oil producers will be a dark horse for prices along with the development of the U.S. shale oil production.

How is the report structured? The report is divided into three parts – each part elaborates on three main topics which are influencing the oil prices: • • •

Fundamentals – covering the supply and demand balance Financials – covering speculators’ interest and the development of the financial market Geopolitics – covering the situation in unstable oil producing regions of the world.



GOSI - Global Oil Strength Index GOSI is the Global Oil Strength Index - an index created to evaluate important issues and their effect on oil prices. It answers the basic question: “Are oil prices going up or down from here?” A high rating is bullish for oil prices and a low rating is bearish. In other words, the index is a lot of information boiled down to one number that indicates whether prices should go up or down.

Oct. 16 50

Jan. 17 50




The Fed could introduce additional interest rate hikes this year; however, Europe and China continue to struggle with lack of growth; though at very different levels. We set financials to slightly bullish.




Supply disruptions in Libya and Nigeria continue; but both countries seem to be on the way to a fragile production recovery. We set geopolitics to slightly bullish.




GOSI is above the 50 level - indicating that our oil price expectation is bullish.


Comments If OPEC and non-OPEC production cuts are implemented over the next 6 months, supply-demand balance could be closer to recovery. Dark horses are indeed on the compliance degree and also the U.S. shale oil production level. We set fundamentals to neutral.


Fundamentals Q4-16 saw some indecisive moves in prices….until the OPEC-meeting end-Nov’16, where prices broke to the upside, ending the quarter up more than 10% from the start and +30% from the low in the quarter. The cartel seems alive and kicking. Question is: who are they kicking? Supply situation: In November 2016 OPEC teamed up and agreed on a production cut of 1.2 mbpd (Non-OPEC countries pledged 558kbpd in addition). The agreement is for 6 months and up for renewal another 6 months on May 25th. The country to cut the most will be Saudi Arabia (almost 0.5mbpd). Iran, Nigeria and Libya are exempt from the cuts “for their own respective reasons” (Saudi Energy Minister al-Falih). Given the history of OPEC agreements, we expect a compliance rate of 60-70% of the 1.2mbpd. The non-OPEC cut is largely dependent on Russia as they have pledged to cut 300 kbpd (Psst, don’t look now, but Mexico’s pledge of 180kbpd would have happened anyway due to natural decline in their oil wells) In previous “deals” Russia has been somewhat hesitant to fully comply with the “deal”, but given that President Putin seems personally involved this time, the likelihood of compliance has increased. Source: Bloomberg/Global Risk Management

Agreed crude oil production adjustments and levels



U.S. shale oil and production Source: Bloomberg/Global Risk Management

U.S. Shale oil production is expected to halt its decline and potentially increase slightly during 2017 if prices hold their current levels. Break-even prices for shale oil production have been significantly lowered over the last few months. Partly due to companies going out of business and being scooped up at bargain prices by others (who then do not have the same debt to battle with as the bankrupt entity), and partly due to stronger focus on “easy” fields. Technological advances have played a minor part as well, but for now the low hanging fruits have been picked.

DEMAND situation The headline for demand might as well have been “dog bites man” (=no real news). It is a slow, steady and very non-dramatic rise. Yes there will be more electric cars. No, they will not have a massive impact on global consumption in the next couple of years. Yes there will be more wind mills, solar panels, hydro power. No it does not mean the world will stop running on oil in the near future (or even show signs of lower demand). We continue to estimate demand increases of approximately 1 mbpd per year. We set fundamentals to neutral.


Financials Much has happened in the past year, most of it unexpected and with a couple of events possibly even going down as watershed moments in history. In June 2016, the United Kingdom announced that the country had voted to leave the European Union (Brexit). Against literally all polls, Donald Trump won the U.S. presidential elections on 8 November. The Federal Reserve (Fed) raised interest rates by 25 basis points in their 14 December FOMC meeting and has projections for 3 more rate hikes in 2017. With this, the U.S. dollar rose to its highest since 2003, aided by the ‘Trump’ effect which saw U.S. stocks rise by more than 6% since the elections. Out of the above, the most surprising of events are in our opinion Brexit and Trump’s win. Globalisation allowing for international mobility in labour and jobs has resulted in discontentment from the loss of jobs in areas affected. These seemed to be the main themes in Brexit and Trump’s nomination and could be ongoing themes in future elections worldwide. Despite the similarities in the causes of Brexit and Trump’s nomination, the two events have had very different effects on the financial markets. In the former, the sterling tumbled and a flight to safety occurred as the framework and process of the UK leaving the European Union continues to be ironed out. Trump’s nomination, however, saw renewed optimism in the markets on a potentially business friendly albeit protectionist regime and the U.S. dollar soared. The rising business sentiment and strong labour market have led to the Federal Reserve forecasting 3 rate hikes in 2017 in the latest dot plot projections. We saw a similar projection for 2016 after the rate hike in December 2015 and we all know how that one turned out. Buy three projections, get one delivered… maybe. The markets, as implied by Fed Funds futures, are also currently predicting between 2 and 3 rate hikes for 2017. We think it could be a similar case of unmet expectations in 2017 with headwinds coming from



European general elections and continued slowing of China’s growth. Like the one just past, this year may see instances where the market is contemplating no rate hikes for the year. Therefore, we believe there will be downside risk for the USD.

Donald Trump’s policies as president will also have tremendous impact on oil. His campaign promised deregulation of the fossil fuels industry which includes lifting restrictions on the federal lands in Gulf of Mexico and in the Arctic on how much oil can be pumped, and greenlighting the Keystone XL and Dakota Access oil pipelines. The appointments in his cabinet do not suggest otherwise; Rex Tillerson, former Chairman and CEO of ExxonMobil, was appointed Secretary of State, Rick Perry, former governor of oil-rich Texas, as head of Energy Department. Scott Pruitt, a friend to Oklahoma’s home-grown shale industry and climate-change sceptic, as head of the Environmental Protection Agency and Ryan Zinke, a former CEO of an oil and gas consulting firm, as head of Interior Department. Despite fears of oversupply and potential deregulation of the fossil fuels industry weighing on prices, we believe the coming administration will be very savvy in navigating the oil and energy area. Oil producers need higher prices and it is now also in the long term interest for the United States to be involved in the managing of oil prices. Coupled with the fact that the U.S. dollar is at an all-time high currently and could see a reversal, the macroeconomic environment looks supportive of oil prices. We set financials to slightly bullish.


Geopolitics Geopolitics, the effects of geography on international politics and international relations - continue to affect oil prices. Nigeria As one of the countries that were granted exemptions from the OPEC output curtailment deal formally agreed early December 2016, Nigeria was producing 2.2m barrels per day (bpd) before the militant group Niger Delta began to sabotage and destroy oil infrastructures. It was on these grounds that the exemption was granted. Production in Mid Dec 2016 stood at approximately 1.8m bpd; higher than the average of around 1.6m bpd achieved in Q3 2016. There is still 0.4m bpd of room on the upside before reaching peak output. Only recently, in early Jan 2017, the country’s output was boosted by 0.1m bpd as upgrade efforts at 18 wells were completed. Similar works are to be completed in the months ahead which will further boost output. This would offset and slightly derail OPEC’s announced output cut of 1.2m bpd during 2017. It seems likely that this would be the case for 2017 as the government’s priority is lasting peace – referring to a bid to work with the Niger Avengers to avoid crippling attacks on oil infrastructures. Payments of cash stipends to ex militants under the 2009 amnesty were resumed in Jan 2017.

Nigeria relies on crude sales for 70 percent of government revenue.

Source: Bloomberg/Global Risk Management



Libya Libya is the other OPEC member that was granted exemption from the production cut announced in Dec 2016. Prior to the uprising and overthrowing of the country’s leadership in 2011, production stood at 1.6m bpd. It quickly fell to almost nothing that same year. Current production in Jan 2017 stands at 0.7m bpd (0.6m bpd in Dec 2016). This is set to rise to 0.9m bpd by end Q1 2017 and 1.2m bpd by the end of the year. This represents an upcoming offset of 0.6m bpd of OPEC’s announced output cut. Combined with Nigeria’s potential room on the upside, this amounts to a total offset of slightly more than 1.0m out of the agreed 1.2m bpd cut. The UN backed Government of National Accord governs Libya, from Tripoli Westwards. The administration was able to work with the Petroleum Facilities Guard to lift a two year blockade on oil pipelines from the economically important Al-Feel fields. Also, the last of nine main oil export terminals (Zawiya terminal) was recently reopened and exports will resume shortly. Things are on course to higher output numbers as long as the Libyan National Army is able to keep revolts and attacks that could cripple oil infrastructures.

Source: Bloomberg/Global Risk Management


Geopolitics Iraq Output as at end Dec 2016 stood at 4.8m bpd. The country’s share of the Dec 2016 OPEC cut is 0.2m bpd, one of the highest amongst the cartel, which will bring output down to 4.6m bpd. The past two years of low prices were especially costly for the country as it added to the financial strain already significant due to the ongoing offensive against the terrorist group ISIS. Furthermore, of all the Middle Eastern oil producers, Iraq’s oil production contracts are predominantly International Oil Companies (IOC) operated. In these contracts, there are provisions that require the government to compensate the IOCs should production be cut for reasons beyond the control of the driller. Production cuts decided by the government, such as the agreed 0.2m bpd cut in line with the Dec 2016 cut, could potentially trigger the provisions further adding to the financial woes. These combined factors have led to doubts on whether the country would stick to its commitment to the output cut. According to recent reports during Jan 2017, Iraq has begun curtailing production and has reaffirmed its commitment.

Source: Bloomberg/Global Risk Management



Iran Since the removal of economic sanctions after reaching a deal with the P5+1 powers in Jul 2015, Iran’s oil production has risen from 2.6m bpd to 3.7m bpd as at Nov 2016, a remarkable 42% growth. The country is now looking for more than USD 100b of foreign investments to upgrade and rejuvenate its oil infrastructures – significantly more than the USD4b currently invested. With a new model for petroleum contracts already in place, Iran recently qualified 29 international oil giants to bid on planned investment projects. Fresh in the news is Vitol’s recent USD 1b pre-finance deal which comes into effect this month, Jan 2017 – In exchange for the loan, Vitol is guaranteed future exports of refined products for a period of time. We can expect more such deals to be signed in the future. Iran was also exempt from OPEC’s 1.2m bpd production cut agreed in Dec 2016 – in fact, it was allowed to increase production by 0.1m bpd from current production of 3.7m bpd to 3.8m bpd. With this said, however, Dec 2016 export numbers show that Iran’s oil production may have reached a plateau with its existing hardware. Exports to Asian markets were markedly lower and approximately 60% of available floating storage space was taken up towards the end of the month as the lower exports went into storage. As of end of Dec. 2016, this figure stood at 28.95m on 38 tankers at four ports. While investments into infrastructure take time to affect oil production and hence export numbers, the vast amount of crude and condensates on-board floating storage could put pressure on crude prices in the near term.

Source: Bloomberg/Global Risk Management


Geopolitics Russia Iranian President Hassan Rouhani’s eleventh hour call with Russian President Vladimir Putin was the pièce de résistance that allowed the historic OPEC production cut to go through. With low oil prices and dismal economic performance in the country, it was also in Russia’s interest to get the accord struck. Since then, the Ruble has surged by 18% while the main stock index is up almost 30%. But growth for 2017 is forecast to be only about 1% - not out of the woods yet.

Russia agreed to a 0.3m bpd cut in output, from 11.2m bpd in Dec 2016 to 10.9m for 2017. However, if one looks at the bigger picture, Russia oil output rose by 4.7% or 0.5m bpd from 10.7m bpd in Dec 2015 which effectively means that post “cut”, oil production is still higher than before. As with all other countries that rely on oil exports as an income stream to support fiscal budgets, compliance with the agreed curtailment is something that may pose as a challenge. We set geopolitics to neutral to slightly bullish.



Oil Price Forecast

Please note that the forecast is the average price per quarter. Thus, prices during the quarter will likely be both higher and lower.

Global Risk Management’s research team Global’s research team has extensive knowledge of the oil market. The members are analysing the market and the events that affect the oil market on a daily as well as longer term basis. E-mail:


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The Oil Market Annual Outlook Jan'17  

The outlook in less than 60 seconds.... Compared to same time a year ago, oil prices have almost doubled. In our outlook, we give you the m...