It hasn’t been the greatest time to be a player in the oil markets, as excess supply and other regional and global factors have created greater than normal instability. Both Brent and WTI prices have fluctuated considerably throughout the year, though prices have generally remained far lower than in years past. With a turbulent 2016 coming to a close, many have now cast their eyes toward a more hopeful 2017. Though there are indications that 2017 could see a healthy rebound in the flagging oil markets, a number of lingering questions remain.
The OPEC Deal
Perhaps nothing will have a more immediate and significant impact on the global oil markets than the recent OPEC agreement to reduce production across its member nations. The accord calls for the cartel to enact an output decrease of about 1.2 million barrels a day, or 4.5 percent, which is in line with earlier recommendations from September meetings in Algiers. The cuts are a strong step toward rebalancing an overabundant supply that has outstripped demand in recent months, depressing the market and causing economic and political consternation among many of the OPEC member nations.
The agreement was largely viewed as a necessary response after a year of record or near-record production from most OPEC nations, though it remains to be seen how closely the plan will be followed. Past OPEC deals to control output have not always gone smoothly, and the weeks of contentious bargaining raises the possibility that one or more nations may attempt to skirt the restrictions and continue increasing production. Nonetheless, the deal elicited an almost immediate positive response from the global markets, and Brent prices should continue to gradually climb to more sustainable levels as the cuts are enacted. Additional meetings are scheduled to take place in May, where the cuts are expected to be reviewed and likely extended for another six months.
A Mystery in Moscow
One of the most potentially encouraging developments to arise from the OPEC meeting was the inclusion of non-OPEC members in the production cuts. Most notably, despite ramping up production to historic levels in recent months, Russia signed on to enact unprecedented cuts of its own for the first time in 15 years. They are expected to be joined by Azerbaijan and Kazakhstan, though the latter countries have yet to formally announce any planned reductions. The agreed-upon OPEC deal would see Russian oilfields gradually ease their production throughout the first half of 2017, ultimately totaling about 300,000 barrels per day in cuts.
However, it remains unclear whether these cuts will ultimately come to fruition. While Russia has shown a willingness to coordinate production decreases with the oil cartel in the past, the current deal arose only after weeks of recalcitrance and tense negotiations. The deal also comes at a time when the country is mired in several indirect conflicts with Saudi Arabia, and the geopolitical climate may yet play a role in the ultimate outcome of the agreement. Additionally, while Russia’s 300,000-barrel figure represents a significant contribution to the deal’s total output reduction, it pales in comparison to the rapid production increases in the preceding months, which totaled more than 500,000 barrels per day.
An Uncertain Administration
In addition to an unstable political climate across much of Europe and the Middle East, the oil markets in 2017 will also have to contend with a changing administration in the United States. The prospect of a Donald Trump presidency has left global markets unsettled. The President-elect has often stated his goal of being a friend to oil interests, but the reality of that goal represents an open question with which markets must contend as he prepares to take office and enact his agenda. The President-elect has pledged to slash regulations, lift production restrictions on federal lands, expedite key pipeline developments and take other steps necessary to foster greater development of U.S. oilfields, including the Permian Basin and the Bakken formation.
Though these actions could produce a temporary bump in WTI prices, the longer view is less encouraging. Additional development in the United States will only add to the tremendous oil surplus already in place, further depressing the markets and potentially countering some of the gains made by the OPEC production deal. Once in the Oval Office, Trump could also elect to revoke standing sanctions on Russia incurred as a result of its military incursions into Crimea and Ukraine, which may cause a surge in Russian oil production despite the agreed cuts. Conversely, reinstating sanctions on Iran – another frequent pledge from Mr. Trump – could curb production there and slow foreign investment in the country.
Though the overall picture remains cloudy, it’s likely that demand for oil will continue to grow through 2017. Despite declining consumption in wealthy nations – fueled in part by more efficient vehicles and a general trend toward renewable energy sources – developing nations will continue to require greater volumes of oil for the foreseeable future. A continued economic recovery, however slow, should also result in a more favorable forecast for the oil markets. If the OPEC member countries and their non-OPEC counterparts can successfully enact their planned production cuts, the supply imbalance will also be significantly reduced in the months to come. While a rally to pre-crash peaks is exceedingly unlikely, modest growth to a more sustainable and stable range appears to be within reach.
