What will be the Main Oil Price Drivers in 2017?

Picture of Andre Davis

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.

1. Compliance

Picture of an oil drill

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

Picture of Donald Trump

President-elect Donald Trump

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.

How The Events Of 2016 Have Reshaped The Oil Industry And Maybe, The World

Picture of Andre Davis

While political events like the EU Referendum result and the election of Donald Trump in the US presidential elections have drawn a lot of attention from the media and have both affected the global economy, other events have also had a significant effect on the oil and gas industry.

In this article, our co-founder and commercial director, Andre Davis, outlines how events in Saudi Arabia could kick off a new oil war.

This year has seen some seismic political events take place. The kind that can have a serious effect on the world as a whole. However, significant events have also taken place in the oil industry this year that could end up having a seismic effect on the world as a whole too.

Picture of Donald Trump

President-elect Donald Trump

Firstly, to briefly tackle those seismic political events – The majority of the British electorate voting for Brexit and the Electoral College voting Donald Trump as the next President of the United States - any change creates potential uncertainty in the markets, and you could sense as The EU Referendum vote approached that businesses had started to become reticent and markets were beginning to flitter nervously. This was because there was such uncertainty over what the outcome would be in the run-up, and this is not conducive for business of any kind. The tone of the Presidential race across the Atlantic, along with the uncertainty of what that result would be given Mrs Clinton and Mr Trump were two of the most unpopular Presidential nominees ever, served to compound the problem, and I certainly noticed earlier this year that any speculative projects and major investments my clients were considering were put on hold, with them instead concentrating on completing essential works, maintenance and repairs.

However, I would argue the most significant event to affect the oil and gas industry this year has been the opening salvos of a new oil price war caused by the boom in America’s fracking industry.

Due to the expansion of fracking in the United States in the last few years, America became the No.1 producer of oil worldwide almost overnight. This caused Saudi Arabia to respond in two ways. The first and most important way was to oversupply the market through Saudi-controlled OPEC. This was designed to drive down the oil price from a high of $140 per barrel and drive US frackers, who often need at least $60 per barrel just to break even, out of business.

In addition to frackers in the USA, the low oil price affected everybody around the world, particularly the smaller producing countries who are almost 100% reliant upon oil for their Gross Domestic Product (GDP) revenue.

As a result, oil prices had to rise, and I would argue this was one of the main drivers behind the various announcements by the Organisation of the Petroleum Exporting Countries (OPEC) and Russia agreeing to decrease production in order to raise prices per barrel levels recently.

The most recent announcement was just last week. These represent the first official production cuts since the global recession of 2008. I would say the agreement is unprecedented in nature too because it has allowed Iran, Iraq and Nigeria to be exempt from the cuts, and they are now continuing to ramp up production following the lifting of United Nations (UN) sanctions.

This is significant because Iran is Saudi Arabia’s arch enemy in regional terms, illustrated by the horrific proxy wars currently taking place in both Yemen and Syria, which have been funded and supported by both countries on opposing sides.

All of this makes clear how important reducing the over-supply in the market and engineering a price rise now is to all the oil-producing nations whose government budgets have been decimated by the low oil prices. The market responded immediately to this news too, with prices surging in the immediate aftermath of the announcement. These prices continued to rise as other non-OPEC countries committed to lowering production too, although the American Petroleum Institute’s (API) announcement this week that US crude oil reserves continue to rise could begin to have a countering effect.

Picture of Prince Mohammad bin Salman

Prince Mohammad bin Salman of Saudi Arabia

Oil price wars involving Saudi Arabia have not been unusual over the years, but these recent events coincided with something else, namely the declaration by Saudi Arabia at the beginning of this year that they intended to float part of state-controlled Saudi Aramco, the world’s largest oil company by capitalisation and production. In May of this year, Prince Mohammad bin Salman, Saudi Arabia’s deputy crown prince, then announced that the Saudi authorities intend to list Aramco on the Hong Kong, London and New York Stock Exchanges with an Initial Public Offering (IPO) of 5% of its equity. This was an unprecedented move, as Saudi Arabia is a notoriously secretive country, so to open the accounts of the national oil company (even partially) for scrutiny by the West took some completely by surprise.

In addition, Prince Mohammad has also indicated an intention to use the funds generated from the IPO to create a sovereign wealth fund in order to capitalise on western investment opportunities and diversify the Saudi economy so that it is not overly reliant on oil. As Prince Mohammad himself puts it; “We will not allow our country ever to be at the mercy of commodity price volatility”. Therefore, this intention to shift away from Saudi Arabia’s reliance on its oil wealth also raises the question of whether there would be a permanent shift in the status quo of the oil and gas industry as we’ve known it.

All of this adds up to greater uncertainty, thus bringing us full circle.

As such, people will now wait to see if Britain does indeed start the process of leaving The European Union, how the floatation of Aramco pans out, and arguably most importantly, whether the new President-elect’s policies can provide the stimulus to big business, and the oil industry in particular, that he promised throughout his campaign. I say this, as I feel there is a sense that, unless all of these unprecedented events of 2016 go in the right direction, creating the jobs and wealth promised, another global recession could be just around the corner.