Key Points:
- Libyan ‘Force Majeure’ event ceases.
- Russia meets around 66% of their pledged production cuts.
- Medium term outlook on oil remains unchanged with Q2 estimate of $47.20-$48.40.
Crude Oil prices largely headed in a positive direction last week as the market was beset by the risk of falling production following, what was termed, a ‘Force Majeure’ event. Subsequently, West Texas Intermediate (WTI) prices received an immediate boost and rallied back above the $50.00 handle. However, we now know that the event was largely due to warring factions blocking access to Libyan pipelines and that supply might have just been restored. Subsequently, it begs the question as to whether crude prices will face pressure as the additional supply returns to the global markets.
The return of the Shahara and Wafa oil fields to full production is definitely an unexpected surprise and required significant intervention following their blockading by armed factions early last week. The overall impact on Libyan crude oil production was stark given that those two fields represent around 36% of the embattled countries current output. Subsequently, the return of around 252k b/pd of crude production to the world markets is likely to have an immediate impact on prices.
However, although there is likely to be additional downward pressure on Crude Oil prices, Libya is likely to remain relatively unstable in the face of ongoing warfare amongst the various militias. Subsequently, it is highly likely that there will be further supply disruptions over the medium term until some form of government is re-established within the war torn state. The current regimes output goals remain focused on increasing productive capacity to 1.1 million b/pd within 2017 but that supply is likely to remain unstable at best.
In contrast, Russia is following through with much of their purported production cuts and, at last count, has cut over 200k b/pd, about two thirds of their original pledge. Although, the target for the OPEC and non-OPEC agreed cuts remains in place it seems difficult to foresee many nations fully reaching the pledged levels. Subsequently, there could be significant pressure on producers to cheat on the original agreement, or at least reduce their commitments, given the present levels of compliance by other nations. As always with OPEC deals, the devil is in the details and most members are not known for their adherence to cartel targets.
Subsequently, although crude oil prices might currently be residing around the $51.20 a barrel price (WTI), the old pressures of rebalancing are likely to return in the near term. Therefore, our medium term forecasts remain in place for WTI prices to return to the $47.20 – $48.400 level by the end of Q2, 2017. Rebalancing must still occur within the market and OPEC needs to get on board and realise that the new oil order is upon us.
