Oil market to recover, but OPEC deal extension key: Al Rajhi Capital

The global oil market is expected to recover in the near term, but extension to OPEC’s six-month production limit deal will be key for sustained impact on crude prices, brokerage firm Al Rajhi Capital said in a report on Thursday.

“There may be supply side risks in 2017 in the absence of extension of the OPEC deal or if US production picks up,” the company said. “Hence without extension of the OPEC deal, we could see market going into surplus in the medium term.”

Soon after the output limits for Organization of Petroleum Exporting Countries (OPEC) and some major non-member producers were enforced at the start of this year, oil prices rallied to hit a high of $57.1 per barrel (bbl) on January 6.

The concerns over rising inventories, however, limited the gains, the brokerage said.

In the long term, Al Rajhi Capital said breakeven price for US shale companies is likely to remain high, which may continue to limit US production going forward unless oil prices increase further.

Al Rajhi Capital added that although US shale producers have started witnessing a broad improvement in their cash-flows on oil price recovery and sale of non-core assets, it expects shale production to decline or stay stagnant because higher breakeven oil price.

According to the report, the breakeven price for US shale producers varies from $42/bbl to $60/bbl across the major US shale plays.

On the demand side, the report said that the transportation sector – which accounts more than 50 percent of the total global oil consumption – will continue to be a long term driver with Asia playing a vital role.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com