QNB Analyzes Drivers Behind Oil Recovery in Latest Weekly Report

Doha, August 05 (QNA) - QNB's weekly noted, released Saturday, focused on the recovery of oil prices during the first half of 2017. The report noted that the average prices of oil barrels during the first half of 2017 reached $54 a barrel. This came following the agreement at the end of 2016 between OPEC and some major non-OPEC producers to restrict output. Prices then slumped to an average of USD48/b during June and July, mainly due to concerns about rising production in the US as well as increasing supply from Nigeria and Libya who were exempt from the OPEC agreement. However, oil prices rebounded in July and rose 13 percent to close the month at $53 a barrel. The report highlighted two reasons as the main factors behind the rebound. First, crude oil inventories, which had been rising persistently earlier in the year despite OPEC cuts, have begun to fall. In the U.S., crude oil inventories began to decline particularly rapidly in July and by more than expected. They fell by an average of 6.5 million barrels each week compared with an average increase of 0.9 million barrels during the first half of 2017. Although inventories usually fall at this time of year as it is the driving season in the U.S., they don't usually fall by as much as this. The drawdown of inventories in the U.S. has been enlarged by targeted OPEC efforts to cap exports. Saudi Arabia's energy minister spoke about reducing exports to the U.S. in May and at the end of July announced that total exports would be capped at 6.6 million barrels a day. In the whole of the OECD, stocks are expected to fall from a peak of 3.02 billion barrels in May to 2.99 billion barrels by the end of the year. The second driver of the recovery was the increased effort by OPEC and other oil producers to enforce stricter compliance to the output cut agreement towards the end of July. OPEC compliance with the output cuts was 100 percent in Q1 but slipped slightly to 94 percent for the whole of the first half of 2017. Meanwhile, non-OPEC compliance has improved from 18 percent in Q1 to 61 percent for the year so far. The weekly note highlighted that there is still room for improvement in compliance with the output cut agreement. On July 24th, the OPEC-non-OPEC monitoring committee stated that it would try to increase compliance with the output cuts. In the following days, a number of major producers, including the UAE and Kuwait affirmed their commitment to the agreement and said that they would make deeper cuts to their production. These statements gave a considerable boost to oil prices. QNB maintained its forecast for oil prices at $55 for 2017 and $58 for 2018. They noted that prices have average $52 a barrel so far this year. The latest IEA data suggests that the market will be undersupplied by around 700k b/d in 2017 and 600k b/d in 2018, assuming that OPEC extends its output cuts for the full year in 2018. OPEC aims to reduce inventories to their historical five-year average. This should lead to considerably higher prices. However, US shale oil producers are likely to increase supply when prices rise above their cost breakeven levels. This should lead to considerably higher prices. However, US shale oil producers are likely to increase supply when prices rise above their cost breakeven levels. (QNA)