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MOSL: OIL & GAS-Towards a more balanced future; Some sanity finally against possible future shocks in crude oil supply

Oil & Gas: Towards a more balanced future; Some sanity finally against possible future shocks in crude oil supply

 

• Continued high oil prices finally resonated well with OPEC & non-OPEC countries, resulting in them agreeing to cut over compliance of agreed cuts over the weekend.
• This is expected to result in increase of ~1mnbopd of oil production in H2CY18, bringing much required balance to oil demand and supply. Even when oil prices went above USD140/bbl in 2008, or when oil prices were above USD100/bbl during 2011-14, OPEC did not wink a moment. This is the first agreed increase in production post 2005 and shows that ~USD75/bbl is somewhat a tipping point in the changed dynamics.
• IEA records a surplus capacity of 2.7mnbopd with Saudi Arabia, Iraq and Kuwait, which could well be used to balance possible shocks in supply from other countries. A balanced oil market is expected to bring much required relief to the Oil Marketing Companies (OMCs), in our view.

 Opportunism amid misfortune of others

• With effect from Jan 2017, OPEC & non-OPEC countries decided to cut 1.8mnbopd of oil production. However, Venezuela and few others kept witnessing sharp decline in their oil production due to internal problems.
• Instead of adjusting to the changed dynamics, others kept squeezing the market resulting in compliance of 141% during Oct’17-May’18 among OPEC countries and 95% compliance among non-OPEC members.
• Brent spiked 34% during the period to USD75/bbl, causing worries for countries like India which imports ~80% of its oil requirements.