At this level, it is likely that marginal producers, namely US shale oil producers, will begin coming back into the market, which we expect to cap prices at around $60/b.
Opec agreed to cut output by 1.2m barrels per day to 32.5m barrels, effective from 1 January 2017.
The agreement is for a period of six months, but could be extended by six months at the next Opec meeting in May 2017.
Furthermore, an agreement appears to have been reached with non-OPEC countries.
Russia’s energy minister said it would cut production by 300k barrels per day (b/d) and a meeting in Doha this week between Opec and non-Opec producers could lead to an additional 300k barrels of non-Opec cuts.
The announced agreement involves deeper cuts and more details of where those cuts are going to come from than expected.oil price projection
As a result, the market response was highly positive and oil prices rose by 8.8 percent to $50.5 per barrel from $46.4 the day before the meeting.
Going forward, the outlook is more bullish for oil prices as a result of the Opec agreement. However, there is a risk that the agreement may not be fully implemented. Therefore, QNB examinea two scenarios.oil price projection
First, it looks at the implications for prices in 2017 if Opec and non-Opec cuts are fully implemented and second, it looks at expected prices if production remains at current levels.
The first scenario assumes that Opec cuts production to32.5m b/d for the whole of 2017 and non-Opec countries cut production by 600k b/d from current levels.
Based on data from the International Energy Agency (IEA), the global oil market has been oversupplied by 600k b/d on average in 2016. Accordingly, QNB expects the price to average $60/b in 2017.
In the second scenario, QNB analysts assume that compliance with last week’s agreement is weak, with no cuts by Opec from current levels and non-Opec production rising in line with expectations before the Opec meeting.
Under the scenario, the market will remain oversupplied by 500k b/d in 2017, but the excess supply will be reduced. As a result, prices are expected to rise to an average of $55/b in 2017 from an $45/b in 2016, in line with our previous forecast.
Full implementation is unlikely for a number of reasons. Primarily, while core Opec countries typically comply with quotas, a number of other countries have a history of slippage.