Oil prices hit $58/bbl as OPEC's output cuts pay off

Oil prices rose to their highest level in 2017 on Monday as OPEC said that market rebalancing was well underway, while Turkey warned that it would cut off the pipeline carrying oil from Iraq’s Kurdistan to the rest of the world.

Global benchmark Brent crude was last up 2.1 percent at nearly $58.04 per barrel (bbl), while West Texas Intermediate rose 1.3 percent to $51.34/bbl.

“Brent price has risen to $58/bbl, the highest level for 2017, as production cuts announced by OPEC and some non-OPEC producers seem to be working,” said Ehsan Ul-Haq, director – crude oil and refined products at UK-based Resource Economist.

“Oil stocks are being depleted, while oil prices are not high enough to produce life support to shale oil producers. Compliance to cuts has been remarkably strong, though it might be difficult to bring global oil stocks to the five-year average by March 2018,” he told Argaam. 

OPEC and non-member countries achieved a record high conformity level of 116 percent in August with their December deal to reduce production by a combined 1.8 million barrels per day (mbd).

The cartel’s Secretary General Mohammad Barkindo told a conference in Singapore on Monday that the oil market was “on the road to rebalancing” as producers comply with output cuts and crude stocks diminish.

OECD commercial crude inventories declined to 170 million barrels above the five-year average in August 2017, from 340 million barrels at the beginning of the year, Barkindo said.

“Crude in floating storage is also down by an estimated 40 million barrels since the start of the year, with the support of a narrowing contango, and even signs of backwardation in relation to ICE Brent in Europe,” he added.

OPEC expects global demand to increase by nearly 16 million barrels a day until 2040, at which time it could reach around 111 million barrels a day. About 70 percent of this growth is expected to come from emerging and developing economies in Asia.

As refinery capacity grows in the region, Asia-Pacific is expected to import more crude in the coming decades, which is bullish for Middle Eastern oil producers.

“Crude exports from the Middle East to the Asia-Pacific region are expected to increase by 7.5 mbd between 2016 and 2040, rising from 14.5 mbd to 22 mbd,” Barkindo said.

“So, for the foreseeable future, we can count on the Asia-Pacific region to be the primary outlet for OPEC and Middle Eastern export barrels,” he added.

Meanwhile, oil prices also saw support after Turkish President Recep Tayyip Erdogan said he opposed Kurdistan’s independence referendum, noting that Ankara could shut of the region’s main export pipeline.

Iraqi Kurds are casting ballots today in the country’s Kurdish region and disputed territories on whether to support independence from Baghdad.

The referendum faces strong opposition from Iraq’s central government as well as Turkey and Iran, which both have significant Kurdish populations.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com