In his interview with Rossiyskaya Gazeta, Alexander Kurdin, Research Manager, Directorate for Fuel and Energy Economy of the Analytical Center, spoke about how 'black gold' prices would behave this year.
Crude Oil Prices Are Unlikely to Fall Below USD 50 in 2017 but May Get Past the USD 60 Mark
Alexander, what steps of the new administration in the United States might affect the oil market?
Alexander Kurdin: Presumably, Trump will take political decisions which would cause further enthusiasm among sectoral investors. Primarily in pipeline construction. For example, previously environmental considerations were a serious barrier to pipeline construction for transporting Canadian oil to refining centers in the United States, and now they will, apparently, take back seat.
The second aspect is offshore drilling and drilling on federal land, which is now restricted due to considerations relating to environmental protection and the preservation of strategic reserves. The petroleum industry hawks, of course, actively advocate for the development of these areas and water space, yet it remains unclear how effective this would be if low prices persist. No specifics yet on this – nothing but loud headlines. Yes, some experts say that Trump's policy can cause prices to drop to USD 20 per barrel but this would be too dramatic a twist, I guess.
Let me remind you that an easing of environmental restrictions in drilling and natural gas extraction was among the factors which affected the shale industry development. Several years after this decision of the George Bush administration, shale gas and then shale oil went uphill, although, certainly, a plethora of other factors had a key role to play.
How long will it take the United States to complete this turn?
Alexander Kurdin: I think it will take the full Trump's presidency; that is, by 2020 they will be able to increase their daily output by 1.5-2 million barrels per day due to policy changes. But serious offshore projects require more time than the rollout of shale oil development.
Even if Trump's decisions do not directly affect output now, investor expectations will become a lever that will put downward pressure on the price level. I must say that investors and prices respond very actively even to the slightest changes in output, reserves, the number of drilling rigs in the United States because it is where all finance centers are based.
On the other hand, apparently, energy saving and renewable energy are not what Trump and his oil lobby are likely to insist on. Therefore, there are some positive expectations regarding oil demand growth in the United States themselves. Though alternative energy technologies will evolve anyway, if not there, then in Europe or Japan.
Has shale oil extraction in the United States already responded to the current price raising?
Alexander Kurdin: Judging from empirical regularities, until the price hits the barrier of USD 60 per barrel, there are no preconditions for them to ramp up production. Their problems start when prices drop below USD 60. That's why last year output in the United States decreased fairly significantly – by half million barrels per day. This year they can be expected to win back the same or a bit more.
But this is unlikely to have any impact on prices as this year there is shortfall of some 0.8 million barrels per day.
Last year, OPEC roughly increased its average annual output by 1 million barrels per day due to Iran whereas the United States and China reduced theirs by 0.7-0.8 million – in China, like in America, the economic feasibility of field development at global oil prices below USD 60 is dubious.
Overall, global crude oil output gained 0.3-0.4 million barrels in 2016 versus an average of 2.5 million in previous years. In other words, output has stabilized.
At that, did demand grow steadily?
Alexander Kurdin: Yes, it did. 2016 saw a fairly good increment, approximately 1.4 million. Accordingly, in 2015 oil surplus rose beyond 1.5 million barrels, which is a rare phenomenon in the oil market, whereas the average "shed" in 2016 was 0.7-0.8 million.
That said, in the middle of the year we were fairly close to equality but at the end of the year the situation in Libya and Nigeria improved, and other countries started flooring output in order to earn themselves reserve for reduction before OPEC+ agreement.
That is why at the end of the year we again witness a fairly big surplus, nearly one million barrels. But everybody understands – an agreement has been reached, output reduction is beginning, and prices, driven by these positive expectations, have already risen above USD 55.
How will shortfall arise then?
Alexander Kurdin: This year's average annual reduction in OPEC countries in real terms will be some half million barrels per day, and so it will be calculated based on the level reached in late 2016, which is fairly high in all countries. We assume that OPEC countries will remain at 32.5 million barrels, as they have agreed, or slightly higher levels throughout the year.
If OPEC's output reduction is coupled with demand growth, most likely at a standard pace (plus a little over one million barrels), then balance will improve by 1.5 million barrels.
This year has witnessed a surplus of 0.7-0.8 million barrels, hence, 2017 will see nearly the same level of shortfall. Not bad, at least it will allow clearing the reserves accumulated in 2016 and beginning to get rid of 2015 reserves. Apparently, in the second half of the year shortfall will усилится.
In the end, what are the expected crude oil prices in 2017?
Alexander Kurdin: The only thing I can say is that owing to the oil output reduction agreement crude oil producers have tested the bottom of USD 50 per barrel. In other words, we can hope that, no matter how bad the news is, we will not fall beyond 50. I would rely on this cautious forecast. The clearing of reserves, of course if OPEC behaves correctly, will create preconditions for a price increase, but I don't expect any significant growth. It might be too early to talk about USD 80. So far, this sounds like science fiction. I think that getting past the USD 60 mark by the end of the year is doable.
What about domestic output forecasts? Will it go down? Petroleum companies have been exposed to sanctions for 2.5 years already and it remains unclear for how long sanctions are here to stay.
Alexander Kurdin: Obviously, companies don't feel very comfortable, which explains their willingness to participate in oil output reduction, in which they see a fairly noticeable resource. But our analysis that we have performed together with the Energy Research Institute of RAS shows that the investment necessary to replenish declining output until 2020 has already been made to a considerable extent. There is solid ground to expect no significant reduction by that time due to natural reasons.
I can't say that petroleum companies are undergoing a crisis. Output in Russia isn't that expensive, costs are not very high due to the ruble devaluation, it is possible to save on service. And experience shows that companies find money in China, in Arab countries.
As far as expensive projects are concerned, if companies postpone these projects, it's good for them, it decreases the burden of their expenses.
In the past two years, fiscal burden on petroleum companies has grown, they have talked about cutting down investment because of that. Is 2017 gonna be the same?
Alexander Kurdin: Indeed, the problems faced by companies have been associated, to a considerable extent, with the uncertainty about fiscal policy. Currently there is a positive signal which has to do with the fact that tax maneuver has not undergone any drastic change and the budget situation no longer requires considerable further divestitures from the petroleum sector, given the action already taken.
By 2016 year-end, the Reserve Fund had in place not more than about RUB 1 trillion, which, in general, is consistent with last year's estimates. In 2017, with oil prices of USD 50 per barrel, federal budget shortfall can possibly be less than RUB 1.5 trillion yet in 2018 it was notably lower. As a result, the Reserve Fund's resources and revenue from the sale of shares in Rosneft (almost 0.7 trillion), if used to cover expenses, might be enough for 2017 and partly for 2018.
Second, the major burden of crude oil price lowering was assumed by the bud8get rather than companies. Plus, they were able to earn extra devaluation profits at some point. As for investment, this, in fact, depends on specific projects. We are known to have contracts with foreign partners in the Arctic, which were frozen due to sanctions, but a fairly big amount of investment persists within a broad range of common petroleum projects – furthermore, overall, investment in the Russian oil and gas output grew in 2016.
For details, see Rossiyskaya Gazeta.