Oil price rally likely
short-lived as OPEC deal not enough to reduce glut
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[December 01, 2016]
(Reuters) -
The
oil price rally sparked by an OPEC-Russia deal to cut output is likely
to be short-lived, say traders in Asia, because the agreement may only
draw more supplies from storage tanks and more crude shipments from the
United States.
And even without increased supplies from elsewhere, if the Organization
of the Petroleum Exporting Countries (OPEC) and Russia do reduce
production by 1.5 million barrels per day (bpd) as pledged, the cuts
would not be deep enough to shrink a glut that began to build in
mid-2014, traders said.
"The cut by OPEC will be largely offset by increases in U.S. production
where the rig count has already increased," said India Oil Corp's
Director of Finance A K Sharma.
"So surplus (oil) will stay in the market. If there is any impact, it
will be short term."
Higher oil prices and lower production costs are encouraging U.S. shale
operators to increase output, while Kazakhstan started production at the
Kashagan field in October. [O/R]
Traders said the extent of the impact of the output deal will also
depend on how it affects exports from Saudi Arabia and other OPEC
members.
Cuts in export supply from producers could come from changes in
operational tolerance, a contractual clause that allows either the buyer
or seller to increase or reduce volumes by up to 10 percent, trade
sources said.
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The OPEC deal "will provide some price momentum but it cannot be
compared with the cut seen back in 2008," a Singapore-based trader said,
referring to the last OPEC production cut at 4.2 million bpd.
Production cuts early in the year are also a normal response to a
low-demand season in February and March when Asian refiners typically
shut for maintenance, he said.
Stronger prompt prices have also narrowed oil contango market
structures, potentially prompting the release of oil from storage that
could add to supplies, traders said.
Oil is more expensive in future months in a contango market, encouraging
traders to store the commodity, but supplies are backed out when spreads
start to weaken.
Strength in Middle East crude benchmark Dubai may also further narrow
its price gap against Brent, leading Asia refiners to buy more oil from
the Atlantic Basin and the Americas, traders said.
IMPACT ON OIL DEMAND, MARGINS
Asian refiners are more concerned about the impact of higher oil prices
on demand and profitability rather than the OPEC supply cuts as most
have other crude sources to turn to.
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![](../images/120116pics/busine27.jpg)
An employee of Cosmo Energy Holdings' Cosmo Oil service station
checks its nozzles at a branch in Tokyo, Japan, December 16, 2015.
Picture taken December 16, 2015. REUTERS/Yuya Shino
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China's independent refiners - also known as teapots - usually take more
crude from South America and West Africa, for example.
The OPEC cuts will come mostly from Saudi Arabia and its Middle Eastern
allies United Arab Emirates and Kuwait, from whom teapots barely import,
so the impact will be minimal, said Zhang Liucheng, vice president of
Dongming Petrochemical Group, the country's largest independent refiner.
As for any broad increase in oil prices, "whether it would affect
teapots' crude demand, we'll need to watch out for domestic demand for
refined fuel, which has not been great as even gasoline demand is
growing less fast," Zhang said.
A spokesman at South Korea's second-largest refiner GS Caltex [GSCAL.UL]
said: "What's more important to us is the product crack spread rather
than the rising crude oil price ... We have to watch how the OPEC
decision will affect oil demand."
(Reporting by Florence Tan in SINGAPORE, Chen Aizhu in BEIJING, Nidhi
Verma in NEW DELHI, Osamu Tsukimori in TOKYO and Jane Chung in SEOUL;
Writing by Florence Tan; Editing by Tom Hogue)
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