Saudi minister: Oil output cuts likely to be extended

KUALA LUMPUR: Saudi Arabia’s Minister of Energy, Industry & Mineral Resources, Khalid Al-Falih, said he is confident that the agreement by oil producers to cut output will be extended into the second half of this year.
“Based on the conversations I have had with participating members, I am rather confident that the agreement will be extended into the second half of the year and possibly beyond, and that includes consultations I had this morning with the prime minister of Malaysia,” he said in his special address at the 19th Asia Oil & Gas Conference 2017 yesterday.
He added that Organisation of the Petroleum Exporting Countries (Opec) and non-Opec partners who agreed on supply cuts are so far exhibiting high levels of discipline and adherence to the commitments that were made. On Dec 10 last year, 24 oil producing countries agreed to cut production by 1.2 million barrels per day for the first half of 2017.
“Despite lingering headwinds, the oil market continues to improve from the conditions we saw earlier last year when the markets were at their low; when crude oil inventories were at an all- time high and were set to continue rising,” Khalid said.
However, he added, the oil market has recently been affected by refinery maintenance and growth in non-Opec supply especially in the US, as well as the actions of financial players in the market, all of which have slowed the impact of the recent production cuts that were exercised under the agreement.
“The producer coalition is determined to do whatever it takes to achieve our target in bringing stark levels back to the five-year average that we started trying to reach,” Khalid said.
He said renewables and electric vehicles are starting to make progress, but the future growth of alternatives is likely to be slow as they are starting from a very small base. Besides technical and economical hurdles, affordability is likely to be an issue in many developing economies as alternatives still require considerable subsidies due to their high cost compared with conventional energy, and global energy transition will be long and complex.
He said the industry needs a diversified energy portfolio encompassing conventional and new energy sources, giving alternatives the time and space needed to effectively, efficiently and economically shoulder a larger burden for energy demand over time.
Khalid said inventories in Organisation for Economic Cooperation and Development member countries have been gradually declining since mid-2016 with an estimated oil start drop of 60 million barrels since they peaked last July while floating storage has also dropped considerably.
“Unfortunately, the US market where most analysts are focused, is where inventories have been fluctuating. But we expect US inventories to resume a downward trend driven by increasing refinery inputs which are underpinned by seasonality and a healthy US product demand that show signs of continuing to grow in 2017,” he said.
On the supply side, Khalid said, short-cycle and smaller projects such as shale, oil developments and incremental investments are picking up as a result of price recovery but longer cycle, more complex and higher cost upstream projects especially mega investments involving expensive marginal barrels remain on hold, with about US$1 trillion worth of global exploration and productions investments deferred or cancelled.
He noted that some of the supplies coming onstream, contributing to higher inventories, come from investments made a decade ago but the backlog of production projects will soon come to an end. In addition, there is the natural decline of the large base of legacy production that can be seen in the North Sea, Mexico, China and other major producing basins including in some Opec members.
“Conservative estimates project that we would need to offset a total of 20 million barrels per day and combine demand growth and natural decline over the next five years. So no matter how fast US shale grows I don’t think it is going to nearly make a dent in that number,” Khalid said, adding that the global oil markets will soon rebalance and return to a healthy state.