executive summary VYGON Consulting - June
Authors Ekaterina KOLBIKOVA Analyst, Ph. D. in Economics E.Kolbikova@vygon.consulting Ivan TIMONIN Junior Analyst I.Timonin@vygon.consulting With participation of: Grigory VYGON and Maria BELOVA VYGON Consulting 1
Executive Summary Members of the agreement overfulfilled their commitments by 1.2 mmbpd in April due to the decline of production activities in Venezuela and a number of other countries that experience challenges in attracting investment, which led to a widening deficit of liquid HCs. Indeed, the agreement was crowned with a complete success: industry stocks began to decline, oil prices increased and stabilized at a level that is comfortable for exporters. In this regard, it has become necessary to alter the paradigm for efforts. Figure 1. agreement compliance by participating countries* (actual minus target production), kbpd Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- 76 109 125-6 -135-177 -103-370 -273-189 -129-137 -278-157 -141-465 Non-OPEC: Russia Kazakhstan Other** non-opec total -257-368 -320-373 -73-121 -214-183 -310-613 -683-713 -818-919 OPEC: Saudi Arabia Venezuela Other -1062-1043 ** excluding Libya and Nigeria ** Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, South Sudan, Equatorial Guinea Source: EIA, Ministry of Energy of the Russian Federation, OPEC, VYGON Consulting VYGON Consulting 2
US shale oil producers acting in opposition to increased their capital expenditure for the first time since 2015, which led to a tremendous upsurge in drilling activities. For, we expect the highest increase in the production of liquid HCs in the entire history of the US oil industry 2 mmbpd over. According to our estimates, two options for the outcome of the upcoming June 23 meeting are the most probable. The : status quo scenario provides for the completion of the agreement at the end of. It will allow some countries to utilize their spare production capacities and drilled but uncompleted wells accumulated during the previous year within three months. As a result, the glut of oil on the world market will average 848 kbpd in 2019. The : new terms scenario provides that the agreement participating countries will compensate for the oil deficit formed on the market before the end of. Thus, in the second half of this year they will have to increase production by 635 kbpd over the first half of. Figure 2. Factors of the world liquid HCs market balancing in under the : new terms scenario, kbpd Balance -648 Demand -1278 US and others -1 1550-300 Balance 1H -677 Demand US and others -1052 963 (US) 635 (Others) 635 Balance 2H 504 Balance * -87 * zero balance is not achieved since not all countries manage to fully implement new quotas Source: VYGON Consulting VYGON Consulting 3
Oil production growth in the US will slightly decrease in 2019 to 1.37 mmbpd. countries will have to increase the actual production by 200 kbpd collectively (relative to ) to ensure the balancing of the world oil market. Given that the oil output of Iran, Venezuela and some other participants of agreement will decrease by 718 kbpd in 2019, the remaining countries will have to increase their production by 919 kbpd over (or by 465 kbpd relative to the second half of ). Figure 3. Factors of the world liquid HCs market balancing in -2019 and distribution of the production under the : new terms scenario, kbpd 201-87 201 320 Other 465-1715 1281 US 454-718 Balance Demand growth Production growth Production decline* balancing effect Target growth total * Venezuela, Iran, Angola, Libya, Azerbaijan, Equatorial Guinea, Mexico Source: VYGON Consulting The 5-year average of OECD industry stocks is not a sufficiently objective indicator of market balancing. Firstly, the oil inventories of non-oecd countries are not accounted for. Secondly, the volume of stocks is estimated with a significant statistical error. Finally, it is not the volume of stocks, but the length of the uninterrupted demand coverage period that matters (inventories increase along with the growth of the latter). VYGON Consulting 4
Since the US is the only producer capable of activating spare capacities as fast as Saudi Arabia, we consider it appropriate to include the US rig count and drilled but uncompleted wells (DUCs) dynamics in the market indicators monitoring and consider them in establishing new quotas. These criteria for balancing the market are the most effective since they allow to determine the trend of oil production in the country 5 months in advance. A number of parameters of the current mechanism of production cuts relative to the October 2016 level can significantly complicate the coordination of the quotas redistribution terms. In our opinion, the so-called total crude oil production ceiling for member countries in the first half of (48.7 mmbpd) should be applied as a new benchmark for the purposes of further market balancing. All materials presented in this paper are solely for informational purposes and only reflect private judgment of the authors and shall not be considered as an urge or recommendation to commit any actions. VYGON Consulting and its executives shall not be responsible for the use of the information contained herein, for any direct or indirect damage resulting from the use of this information, as well as for the accuracy of information obtained from external sources. Any use of the paper materials is only permitted with reference to the source VYGON Consulting. VYGON Consulting 5
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