In this article, our co-founder and commercial director, Andre Davis, outlines what he feels will be the main price driver for oil in the coming year.
At the end of November 2016, the market responded immediately to OPEC’s announcement they would cutting oil production, with prices have surging in the aftermath. This, in turn, created a great deal of optimism about 2017 for the oil & gas industry as a whole.
The effects of this announcement will continue to be felt going into 2017. By general consensus, however, there are three factors that could affect the upward trajectory of prices in 2017.
By nature, and historically speaking, agreements such as the one struck by OPEC with other non-member oil-producing countries are hard to monitor and enforce - who is to say that every country will stick to the agreement for the full six-month period?
Just a few countries not playing ball could throw the grand plan askew. What is interesting is that Saudi Arabia appears to have pre-empted this possibility and have already stated they will make further cuts to what they have already committed to.
2. US Shale
A big player and one of the reasons the strategy to over-supply the market first began. Onshore rigs in the US already began to restart in earnest once the first sounding of an OPEC agreement was mooted.
However, the low price did cause some significant damage in the US, and while low-cost production has grown in the Permian Basin, output has declined in the Bakken and Eagle Ford regions. So, there could be a surge in production from the Permian, but it could take other regions a while to get the wheels turning again and create enough output to heavily affect the agreement. The view seems to be prices will have to be above $60 for at least six-twelve months before we might see US shale heavily affect the market.
3. Trump's Middle Eastern policy
Will he scrap the nuclear deal with Iran? In light of the law that now allows American citizens affected by the 9/11 attacks to sue Saudi Arabia for losses, will he continue to support the traditional US ally in the region or follow through on threats made during and post his campaign of refusing to buy Saudi Oil, withdrawing US businesses, and stopping arms sales due to casualties caused in the Yemen war? On this point, it should be noted that the Obama Administration has now ordered a halt to the selling of arms to Saudi Arabia due to the war in Yemen. Therefore, it will be interesting to see if Trump’s administration continues with this policy once he is inaugurated next month.
Trump is unpredictable and his attitude towards Saudi Arabia and the region in general could have a destabilising effect. However, there is a view that Trump is protectionist first and foremost, and it is likely he will not to be too involved in the region with the exclusion of dealing with Daesh/ISIS.
As situations develop, I’ve no doubt other factors may also come into play, but for now, this is what I see as being the main drivers of oil price fluctuations this year.