From Global Risk Management

The Oil Market Quarterly Outlook April 17

The outlook in less than 60 seconds....

Since our last report, the OPEC and non-OPEC's oil production cuts have been implemented and combined compliance is high. Half way through the 6-month period, talks of exension of the deal are set to take place in May. As some oil producers have cut production, U.S. shale oil producers have turned on the oil taps and ramped up production, limiting the effect of the production cut deal. Global demand is likely to increase around the same level as previous years, by around 1 mio. barrels per day.

The U.S. central bank, the Fed, hiked interest rates in March, planning another 2-3 hikes this year as U.S. economy is on track for growth. The European Central Bank, ECB, could refrain from taking additional monetary easing measures and Chinese growth in Q4-16 came out improved.

The geopolitical situation remains fragile. Libyan oil production has been on the rise, but disruptions emerge as pipelines and ports are subject to clashes and sabotage. Recent situation in Syria  could escalate the geopolitical risk premium further. 

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?”
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From Global Risk Management

The Oil Market Annual Outlook April'17


OPEC’s revised strategy of cutting production to support prices has driven up prices and minimized the contango structure. As a side-effect, shale oil production in the U.S. has gotten its second wind.

Mirror Mirror on the wall, who’s the swing producer amongst them all?

Mirror Mirror on the wall, who’s the swing producer amongst them all?

-         Whilst OPEC cut and pack a mighty punch,

They have yet to eat the Shale lunch.

Come Summer sun or Winter frost

Shale producers have the most flexible costs.

 SUPPLY situation:

OPEC’s revised strategy of cutting production to support prices has driven up prices and minimized the contango structure. As a side-effect, shale oil production in the U.S. has gotten its second wind. Rig counts are up from sub-400 to +1000, and production has increased to around 800,000 bpd. A production increase which offsets a large chunk of OPEC (1.2 mbpd) + non-OPECs (585 kbpd) agreed production cut. The OPEC talks in Vienna on May 25th will show if Ascension day will get a new meaning for the oil markets. On the agenda is the debate on whether OPEC should leave the aforementioned production cut in place or if there should be another 6 months’ extension.

Previously, Saudi Arabia has strongly rejected the idea of an extended period. The tone has, however, changed quite a bit, and the Saudis now seem rather open to the idea. Much will likely depend on the price action.

Across the Atlantic, shale oil producers will be watching closely for any possibility of an extended cut. Many producers are hedged against a drop in price for 2017 and part of 2018. Thereafter, the future for shale companies will depend on prices being at today’s or higher levels (depending on the level of debt in each company). Technical productivity has increased by a considerable amount, and oil majors are starting to play shale as well, as it presents an interesting alternative to conventional oil wells*

*Would you rather

a) spend several $100 million on a rig at sea, where you need a stable/high price for 20-30 years to get your money back (+profit), or

b) spend $5-10M per well on 20 wells, where you “simply” shut the well and let it rest idle when prices are low, and re-activate it when prices go up again?

Obviously the answer is not black/white. It’s simply meant to illustrate that shale is much more flexbile when it comes to (i) investment amount (ii) being hedgeable (iii) being shut on/off, and therefore acts as the better swing production method. You can’t really shut off a conventional oil well whenever prices are low – production has to keep flowing no matter the world marker price due to technical factors.


DEMAND situation

If it feels like you’ve read this part before, you are probably right. When viewed globally, there is very little going on for demand. OECD countries will see a decrease of 2-400,000 bpd due to more windmills, solar, electric cars, better mileage on conventional cars, etc.

All the while non-OECD will see an increase of 1.2-1.6 mbpd (depending on your preference for forecast models) due to higher energy demand. Combined, you get an increase in global demand of approximately 1m bpd.

We set fundamentals to neutral, but with a rather big joker at May 25th. This is the date of the next OPEC meeting in Vienna.

From Global Risk Management

The Oil Market Quarterly Outlook April'17


There seems to be a storm brewing.  Following the US elections on 8 November last year, the S&P 500 is up about 13% after the initial shock to a Trump victory as the market changed its mind to be more forthcoming to a more business-friendly administration.

The rally has not been limited to stateside as the Euro Stoxx 50 is itself up more than 18% in the same period. With this rise in prices, volatility has been low as the markets get more complacent while central banks get more hawkish. The probability of the ECB raising rates in December 2017 is now 30%, while members and commentators of the US Federal Reserve have repeatedly called for 2 more rate hikes by the end of this year. So all well and good then, or is there more to it?

Starting in the US where the Federal Reserve Vice Chairman Stanley Fischer and New York Fed President William Dudley are the latest members of an increasing hawkish panel to call for 2 more rate hikes by the end of 2017. This is despite Fed Funds futures and the markets only pricing in 90% probability of just one hike happening by the end of this year. When the 2 converges, there will inevitably be a bearish shock as either the markets start to price in a more hawkish rate path or enough bad data comes out to warrant an adjustment of the Fed’s expectations downwards.  Either way, expect equity markets to be hit negatively during a period of risk off.

Another U.S. joker on the financials front is whether President Trump succeeds in rolling back the Dodd-Frank regulation as promised during the campaign. If rolled back, it would, amongst others, allow financial institutions to assume more leverage, which in turn would likely cause more volatility in the markets in the years to come.

Across the pond, ECB President indicated in his latest press conference that “there is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance.”  With the cessation of dovishness comes hawkishness as the probability of one rate hike by the end of this year is now significant at 30%, when it was a non-factor just a month ago. If however, the lower rate path in the US described above does play out, there is no reason for Europe to lead the rate hikes so expect more of the same in that scenario. Additionally, Brexit has thrown a spanner into the works for the EU. With the rise of nationalism, every election in an EU country becomes an exercise in confirmation that the union can work. Whether we like it or not, there is a lot of political risk and volatility here.

The elephant in the room in all of this, however, could be China. The country grew more than expected in Q4’16 with a growth rate at 6.8% but the critical figure here is the debt/GDP ratio which has risen to 277% from 254% a year ago.

To conclude, the equity markets have been on a boom of late and we could experience a correction soon in one way another. The dollar has been on a tear of late but with possibly too many optimistic assumptions built in. And if the US, the engine of the recent economic recovery, stalls, everyone else does so too. The financial landscape is looking toppish at the moment, although with not much implications for oil as the dollar correlation has been broken in recent times and the commodity continues to be fundamentally driven.

We set financials to slightly bearish.

From Global Risk Management

The Oil Market Annual Outlook April'17


Geopolitics, the effects of geography on international politics and international relations - continue to affect oil prices.



Iraq holds the world’s fourth largest oil reserves at the moment. It has so far added 10 billion barrels, bringing its total reserves to 153 billion barrels. Plans for 2018 are to add another 15 billion barrels to its inventory. Current production stands at 4.4 million barrels per day (bpd). Iraq’s oil minister Jabar Ali Al-Luaibi mentioned during an energy conference on 2nd April 2017 that the country plans to bring up production to 5 million bpd by the end of 2017.

This is in line with the production ceiling set in late 2016 as part of its fixed policy to maintain Iraq’s share of the global oil market. Iraq is also depending on the increased production to increase revenues.

The fiscal situation has not changed since last quarter’s report. The ongoing war against ISIS continues to drain the country’s resources (a costly requirement since 2014). The oil revenues make up 95 percent of Iraq’s budget. Eastern Mosul was retaken by Iraqi security forces in January 2017 after a three month long offensive campaign. ISIS currently controls the west of the Tigris, which is home to about 750,000 civilians. The municipal centre, central bank and museum were retaken in March 2017.

Interestingly, on one hand, Iraq has pledged to fully comply with its share (300,000 bpd) of the promised oil cuts which have not been fully met, while on the other hand, it plans to increase its output by 600,000 bpd by the end of the year.





For the month that ended on 20th March 2017, Iran’s total exports of oil and condensates rose to a record of 3 million bpd. The country has amazed the oil and gas market with its pace of output growth since a series of economic sanctions were removed in January 2016. Iran’s market share of the global oil and gas market is now at pre-sanction levels.

Oil production at present levels is close to its quota of 3.797 million bpd, which was agreed as part of last year’s oil cut deal. The six month deal ends in May with a possible extension of another six months. This is set for discussion during the 172nd OPEC meeting set for 25th May 2017.

In relation to recent news about oil infrastructure investments, a large French oil and gas company giant has been testing Iran’s banking system by sending small amounts of Euros to banks in Tehran in a move to act cautiously as it explores investing into the country despite the lifting of sanctions since early last year. However, the company was the first Western oil major to enter an energy agreement with the country and is currently looking to have a 50.1% stake in the South Pars Phase 11 development. The South Pars oil layer is one of the fields prioritised for investment and is a candidate under the new Iran Petroleum Contracts.

Oil production is expected to be maintained at the agreed quota for the remainder of 2017.



At 48 billion barrels, Libya holds Africa’s largest oil reserves. However, in the years following the overthrow of its previous dictator Ghaddafi, the country fell into a crisis leading to a fall in production from 1.6 million bpd to 260,000 bpd.

Production had risen to 700,000 bpd but has recently slipped to 560,000 bpd due to fresh renewed unrest. The pipeline from Sahara, which is the country’s largest oil field in Western Libya to the Zawiya refinery was closed by the militia recently after economic aid promised to them was not provided. The closure has led to a 20 percent decline in the country’s crude output and the NOC has declared force majeure on loadings of Sahara crude. A force majeure which has recently been lifted and output improved.

In the previous report, we mentioned that Libya has the potential to quickly increase oil production and exports should disagreements between the NOC, the rival militant groups and government be settled swiftly, but the recent closure of the Sahara pipeline shows how fragile the situation is. This recent development is one of many disruptions. In March 2017, the country’s largest port Es Sider was seized and activities were halted. In April, production is allegedly restarted and production is heading back towards 700,000 barrels per day.

In recent times, disruptions have been offset by higher US shale output.


We set Geopolitics to slightly Bullish

From Global Risk Management

The Oil Market Quarterly Outlook April'17

Oil Price Forecast

About the report and the authors

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.

 The GOSI is the background for the medium term forecast on oil prices. The last pages in the report are our forecast and company news.


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