OPEC extends oil output cut through March 2018

Economics Research Desk Market Highlights: Oil & Gas update 25 May 2017 OPEC extends oil output cut through March 2018 Oil prices swung between sharp gains and losses in volatile trade on Thursday, after OPEC agreed to extend its current output-cut deal for a further nine months until March 2018. Benchmark Brent crude oil settled down 94 cents a barrel at USD52.97 while the US light crude was down USD1.04 at USD50.31 as at 10:45 GMT. Prices have declined sharply after the Saudi energy minister added that the consensus is that deeper cuts are not needed at the moment. The OPEC-led cuts may only result in a balanced market this year, however for 2018 and beyond, oil markets are anticipated to return to oversupply, albeit at a lower level than 2013-2016. Outcome of discussions in Vienna OPEC and non-opec have committed to cutting 1.8mln barrels per day until June 2017, a decision made last November. Following today s meeting and in line with market expectations, the production cut has been extended for an additional nine months until March 2018 to eliminate the global oversupply or achieve a sustained price recovery. While stockpiles are shrinking, ministers acknowledged that the surplus built up during three years of overproduction would not clear until at least end-2017. The cuts are likely to be allocated among a dozen of non-opec members led by top oil producer Russia, which reduced output in tandem with OPEC from January. Non-OPEC producers will meet OPEC later today. Intraday Brent price, USDpb (25 May 2017) 01

Jan.16 Feb.16 Mar.16 Apr.16 May.16 Jun.16 Jul.16 Aug.16 Sep.16 Oct.16 Nov.16 Dec.16 Jan.17 Feb.17 Mar.17 Apr.17 May.17 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 mln bpd OPEC oil supply, mln bpd (2010-April 2017) 36 34 32 30 28 26 24 Benchmark Brent crude oil settled down 94 cents a barrel at USD52.97 while the US light crude was down USD1.04 at USD50.31 as at 10:45 GMT. Both benchmarks have gained more than 10% from their May lows below USD50 per barrel, rebounding on a consensus that OPEC and other producers will maintain strict limits on production in an attempt to drawdown persistent global oversupply. Brent vs. WTI Price Trends (2016-25 May 2017) 60 55 50 45 40 35 Brent WTI OPEC crude production declined to 31.73mln bpd in April, 18,000 bpd lower than the previous month, suggesting a compliance cut of 111%, based on secondary sources estimate. In the first four months of 2017, OPEC s compliance with the production cut deal was at 96% (the IEA estimates). The biggest declines were from Saudi Arabia, the UAE, Iraq and Kuwait, all of which reduced production above respective individual target cuts. On a monthly basis, Saudi Arabia recorded modest gains in production in April, along with Nigeria, Qatar and Gabon. Meanwhile, Russia s output averaged at 11.18mln bpd in April, 100,000 bpd lower compared to average production in 1Q17. 02

OPEC members oil output, mln bpd Country Apr-17 Mar-17 Nov-16 Agreed cut Actual cut* Saudi Arabia 9.95 9.91 10.63-0.49-0.68 Iran 3.76 3.79 3.72 0.09 0.04 Iraq 4.37 4.41 4.59-0.21-0.22 Kuwait 2.70 2.70 2.87-0.13-0.17 UAE 2.84 2.91 3.08-0.14 0.24 Qatar 0.62 0.61 0.65-0.03-0.03 Algeria 1.05 1.06 1.09-0.05-0.04 Libya 0.55 0.61 0.58 N/A N/A Nigeria 1.51 1.46 1.65 N/A N/A Angola 1.69 1.60 1.70-0.08-0.01 Gabon 0.21 0.20 0.22-0.01-0.01 Venezuela 1.96 1.98 2.06-0.10-0.10 Ecuador 0.52 0.53 0.54-0.03-0.02 OPEC 31.73 31.75 33.37-1.17-1.64 *based on secondary sources from OEPC Monthly Oil Market Report; Libya and Nigeria exempted from production agreement Source: OPEC Secretariat, Samruk Kazyna US crude oil output and inventories US energy companies added 8 oil rigs in the week to 19 May, bringing the total count up to 720, the highest level since April 2015, which marks a 18th consecutive weekly increase. The number of rigs currently more than doubled the level observed a year ago. The rise demonstrates that US oil producers continue to take advantage of higher oil prices and increase output. Rig counts generally affect production with a time lag of approximately six months. Thus the impact of these extra rigs has yet to be fully reflected in the production statistics. US weekly crude oil production amounted to 9.32 mln bpd in the week ended 19 May, an increase of 0.59% MoM and 6.3% YoY. US weekly oil production is at the highest level since August 2015. Most of the increase so far has come from non-shale producers in the Gulf of Mexico and Alaska. But the massive increase in the number of rigs drilling onshore should see shale output rises substantially in the remainder of 2017. US production will continue increasing for at least the next few months as the lagged impact of earlier increases in the onshore rig count filter through. Weekly estimates are considered less reliable than the monthly numbers, but the two series have tended to follow one another closely, so there is no reason to doubt the continued growth in output. The rapid recovery in US output is one of the factors making market rebalancing slower than OPEC anticipated. 03

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 On stockpiles, US crude oil inventories fell for a seventh straight week as refiners processed a near-record amount of crude last week, based on the Energy Information Administration database. Crude inventories fell 4.4 mln barrels for the week ended 19 May, more than market expectations of a 2.4 mln barrels decline. Gasoline inventories fell only 787,000 barrels compared to expectations for a 1.2 mln barrel draw. US weekly oil output and rig count (2015-19 May 2017) 9,800 9,600 9,400 9,200 9,000 8,800 8,600 8,400 8,200 1,600 1,400 1,200 1,000 800 600 400 200 Oil output mpbd Rig count (RHS) Oil price trends and outlook Market expectations are that despite drastic cuts to OPEC oil production as part of a global deal to curb output, global oil stockpiles are unlikely to return to the five-year average level. The OPEC-led cuts may only result in a balanced market this year, however for 2018 and beyond, oil markets are anticipated to return to oversupply, albeit at a lower level than 2013-2016. One of the key reasons being the rising US oil production, which has risen by 10% since mid-2016 to 9.3mln bpd, capping upside potential to oil prices. Further, US producers have been able to sell future production at higher future prices vs. those for immediate delivery, allowing them to finance expanding output. We previously noted that the enormous concentration of hedge fund long positions might be an important source of price risk. The previous record net long position in oil markets, set in June 2014, preceded the deepest and most prolonged slump in prices for almost 20 years. We expect volatility in oil prices to remain high for the remainder of 2017 emanating from OPEC strategy, modest oil demand growth, geopolitical factors, and continued growth of US oil production. As a result, we are maintaining our 2017 average forecast of USD50-52pb for Brent. Oil price projections, USD per barrel Price 2016 average YTD average, as at 2017f average 24 May 2017 Brent 44.2 54.55 50-52^ ^represents in-house projection by Samruk Kazyna, average price expected for 2017 04

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