At last week’s OPEC conference, Russia and Saudi Arabia made a commitment to extend production cuts through 2018, which removes some market uncertainty and could lead to more stable oil prices, says Brian See, vice-president, equities, CIBC Asset Management.
OPEC members and representatives from other oil-producing countries gathered in Vienna last week to discuss production. They agreed to extend through 2018 the 1.8-million-barrel-per-day cut that had contributed to rising oil prices this year.
“The market had been expecting this type of extension, so, overall, this is actually a positive,” says See, who manages the CIBC Energy Fund. The move will bring crude inventories “down to historical averages and remove the supply overhang, which will ultimately result in more stable prices for the long term,” he adds.
The oil-producing countries agreed to revisit the deal in mid- 2018 to reassess supply-and-demand dynamics.
In November 2016, OPEC and Russia agreed to reduce production by 1.8 million barrels per day in an effort to increase oil prices.
That move followed the plunge of oil prices in 2014, which was caused, in part, by increased U.S. production. At that time, OPEC members failed to agree on a reduction in supply, leading to prices falling as low as US$27 per barrel in 2016. For most of 2016, prices remained in the US$40 range before recovering.
Nigeria and Libya sign on
Two other countries, Nigeria and Libya, also joined the deal. They had previously remained outside the production cuts agreed to in 2016 and had a soft production cap of approximately 2.8 million barrels per day between them, See says.
Bringing them into the deal eliminates another risk to oil prices, he says. “With Nigeria and Libya as part of the deal, it allows for a more unified front in terms of controlling supply and a better outcome for stability of oil prices in the long term.”
Upheaval in Venezuela and Saudi Arabia
The OPEC conference didn’t yield much new information about the political situations in Saudi Arabia and Venezuela, says See, both of which are major oil producers facing domestic upheaval.
In Saudi Arabia, Crown Prince Mohammed bin Salman recently changed the law to allow women to drive, while also cracking down on corruption with the arrests of several high-ranking officials and members of the royal family.
“His 2030 vision plan is attempting to diversify Saudi away from oil into other areas such as health, education and infrastructure,” See says. “This is going to involve a potential private sale or IPO of the state oil company, Saudi Aramco, sometime in 2018.”
Estimates are for a 5% stake to be sold, he says, “implying $100 billion in value and an overall company value of $2 trillion for the state-owned oil company.”
Venezuela, meanwhile, continues to see production declines as social unrest under President Nicolás Maduro increases. See says the country’s state oil company, PDVSA, is at risk of defaulting on its debt obligations.
“This is a significant risk in that oil could potentially go offline and it’s something we’re going to be monitoring very closely as we head into 2018,” he says.
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