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OPEC Production Cut Puts Oil Market in Supply Deficit

December 1, 2016

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Roberto Cominotto, portfolio manager at GAM commented on how OPEC members (on 30th November) agreed to cut daily oil output by 1.2 million barrels. This marks the first production cut since 2008 and most importantly puts an end to the cartel’s two-year strategy of flooding the oil market to push out high-cost producers he said.

“Surprisingly, Russia also seems to be willing to cut its production and discussions with other non-OPEC countries are ongoing. We keep our price forecast for 2017 at USD 60 per barrel” he added.

“Global oil inventories have stagnated or declined over the past six months, pointing to a balanced supply/demand situation. The announced OPEC production cut will result in an oil market supply deficit in early 2017 which will drive inventories lower and prices higher. Our medium to longer term oil market scenario remains unchanged. Unprecedented investment cuts by oil producers around the globe have impaired the oil supply capacity for several years, with the brunt of this beginning to impact in 2017. We expect global oil supply to stagnate or slightly decline over the next 3-4 years, while daily oil demand grows at a rate of 1.0 to 1.2 million barrels. This will keep the oil market in a tight supply situation until the end of the decade or even longer.

“Market participants are skeptical that the oil price recovery can continue on fears of US shale oil flooding the market when prices approach USD 50. In our view, this overestimates the impact of US shale oil production on the global oil market. Representing only 5% of global oil production, US shale oil producers would need to grow their output at a dramatic rate to have a strong impact on the global oil market. We only foresee this scenario if oil prices trade around USD 70 per barrel for a sustained period.  

Shale oil and gas companies most attractive investment

“Conventional oil producers are in the midst of an unprecedented capex reduction cycle which is only just beginning to have an impact on their production volumes and reserve replacements. North American shale oil producers, with their ability to react quickly to changes in commodity prices, are likely to be the main beneficiaries of the sector emerging from one of its worst crises.

“Moreover, North American natural gas prices could trade materially higher over the next couple of months after years of extremely low drilling activity, especially if the current winter turns out to be normal or colder than normal, and supply will struggle to keep up with demand. Shale oil and gas service companies will benefit from increased activity and improved service pricing which has already started to become apparent in the current quarter.”

The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.


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