a look at

Oil situation in 2016 and trends

The price of Brent posted an exceptional decline of around 60% over two years. It was
approximately $44/bbl in 2016, compared with $52/bbl in 2015 and nearly $100/bbl in
2014. With the possible reduction of excess supply in 2017, a price of $50 to 60/bbl can
be envisaged, which would boost investments in exploration. However, the actual price
level will depend on the conditions for application of the OPEC/non-OPEC agreement
and the response by U.S. production. The highly unstable financial and geopolitical
environment may also result in chaotic price movements.

Decline of excess supply in 2016
A number of questions lingered in early 2016 when
attempting to understand trends in oil prices. Some
analysts even announced prices below $30/bbl. The
question focused on whether excess supply in relation to
demand would be absorbed.
It specifically involved anticipating the drop in U.S. supply,
and conversely, the increase in OPEC supply. For their
part, economic forecasts were less than encouraging
and raised questions about trends in oil demand.
The verdict is out for 2016. Overall results for the year
showed excess supply of 0.7 Mbbl/d, a sharp decline
compared with 2015 (+1.7 Mbbl/d). This resulted from
Gradual market stabilization was noted starting in the
second quarter. Rising oil prices, from $30/bbl in January to
$45/50/bbl from May, resulted from this trend (Fig. 1). It was
accentuated by the announcement of an OPEC/non-OPEC
agreement1, approved last November 30 and December 10,
which resulted in prices above $50/bbl at year-end.
Fig. 1 – Monthly and annual Brent price between 2014 and 2016
120
110
99
100
90
80

two key trends: 70

$/bbl

n notable growth in demand which was slightly over 60 52

96 Mbbl/d, i.e. an annual increase of 1.4 Mbbl/d, in 50
excess of historical trends;
40 44
n a decline in non-OPEC supply (–0.8 Mbbl/d), mainly 30
concentrated in the United States (-0.6 Mbbl/d),
20
resulting from weak oil prices since the end of 2014.
10
During 2016, this situation allowed OPEC to increase its
0
market share by nearly 1 Mbbl/d (total of 40.7 Mbbl/d)
2014

2015

2016

without excessive price destabilization. Among cartel

members, the winners were Iran (+0.6 Mbbl/d), Iraq and
Saudi Arabia (+0.3 Mbbl/d each). On the other hand, cer- Source: IFPEN, Reuters

tain countries, including Nigeria (-0.3 Mbbl/d) and

(1) The following non-OPEC countries, 11 in total, are involved: Azerbaijan, Bahrain, Brunei,
Venezuela (-0.2 Mbbl/d) saw their production decline. Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, Sudan
a look at
Oil situation in 2016 and trends

Outlook for 2017 defending their market share was also threatening to
push down oil prices.
As in the past, a number of parameters will likely influ- With increasing budgetary pressure in most producer coun-
ence oil price trends, with different orders of magnitude tries, the oil cartel decided to tip the scales clearly in favor of
and varying lengths of time. In particular, these may restoring market balance. Following numerous discussions
include economic growth in emerging countries, stability which began at the beginning of 2016, an agreement was
of producer countries, the dollar exchange rate and reached at the end of the year. As from January 1, 2017, it
trends in the financial markets (Fig. 2). provides for reduced supply over an initial six month period.
The reduction is set at 1.2 Mbbl/d for OPEC countries, and
Fig. 2 – Factors influencing oil prices
at around 0.6 Mbbl/d for the eleven non-OPEC nations
involved, including 0.3 Mbbl/d for Russia and 0.1 Mbbl/d
Economic Oil prices for Mexico (Fig. 3). With regard to OPEC, Libya and Nigeria
growth
Financial are not involved and could therefore increase production.
markets
Strict compliance with the agreement will result in an
$ rate Demand Production Production average deficit of 1.3 Mbbl/d for the first half of 2017
costs margins compared with 0.7 Mbbl/d if OPEC alone implements the
agreement. These two scenarios result in very different
Geopolitics,
Supply
degrees of oil price pressure.
climate

Fig. 3 – Commitments to reduce oil production within the scope of the

Non OPEC OPEC 2016 OPEC/non-OPEC agreement
Taxes
subsidies
0.2
Oil market
Economy Service
Finance & equipment
Uncertainties costs 0.1

6
Source : IFPEN 0
1 2 3 4 5 7 8 9

Nevertheless, conditions for balance within the oil market - 0.1

Mbbl/d

will define trends in oil prices. In an effort to understand

this, three basic questions must be answered: - 0.2

n will excess supply in the oil market be absorbed?

- 0.3
n if this is the case, what price will ensure development 1 - Saudi Arabia 6 - Iran
of new oil production units needed to balance the - 0.4 2 - Iraq 7 - Russia
3 - Kuwait 8 - Mexico
market? 4 - UAE 9 - Other non-OPEC
- 0.5 5 - Other
n with regard to this rational equilibrium price, what would
be the factors for upward or downward correction? Source : IFPEN

But in both cases, it puts an end to excess supply that

The OPEC/non-OPEC agreement, a potential
source of price pressure
Results from 2016 show that the market has already
begun to stabilize as a result of sustained demand, which
should continue to be the case in 2017 (+1.3 Mbbl/d
according to IEA). However, prior to the OPEC agreement,
there was a significant likelihood that oil prices would
nevertheless remain below $50/bbl.
Inventories of crude and petroleum products held by
Western countries reached record levels, a moderating
factor for the market. OPEC countries’ ongoing policy of
had reached 1.7 Mbbl/d in 2015. The answer to the first
question is yes: excess supply in the market should
gradually be absorbed. However, uncertainty remains
whether this scenario will actually take place.
OPEC must deal with its own members
and American shale oil
First, it is unclear whether OPEC countries will comply
with the agreement. Iran was relatively protected contrary
to Iraq, a war-torn country, which also wanted special
treatment. This differential treatment could create dissent

2
a look at
Oil situation in 2016 and trends
within the cartel. But Saudi Arabia, facing budgetary
constraints, seems prepared to make sacrifices to put
pressure on prices. Khalid al-Falih, the Energy minister,
forcefully stated that his country could reduce production
below the 10 Mbbl/d called for in the agreement.
Another uncertainty, equally important given its potential
impact, concerns the level of U.S. supply. Falling oil prices
since the end of 2014 has weighed on the finances of all
U.S. players in the oil industry. Investment has fallen,
drilling has been reduced by two-thirds and production
has declined.
But operators, some of which are restructuring under
Chapter 112 protection, have adapted to the situation,
increasing productivity of new wells and reducing
drilling costs. Some U.S. basins are now profitable when
oil prices reach between $35 and $45/bbl. This means
that any increase in price above this threshold will trig-
ger a resumption of drilling activity. It already began in
May 2016, when oil prices approached $50/bbl.
Its scope could be limited by a variety of restrictions,
such as delays in personnel redeployment, availability of
drilling rigs and oil transport capacity. However, if these
constraints are overcome, our models suggest the pos-
sibility of a sharp increase in production over a relatively
short period (Fig. 4).
This could become a significant concern for OPEC: price
supports could again lead to excess supply, possibly
during the second half of 2017.
Fig. 4 – 2014/2016 track record and 2017 scenarios for monthly U.S.
shale oil production
7
6
5
4 tion. This was not a foregone conclusion, given the nume-
Mbbl/d
3 The most significant concerned Saudi Arabia, which did not
2 seeking adequate agreement and Iran, which wanted to
High scenario
1 Low scenario
Median
0 The agreement, which calls for a reduction of 1.2 Mbbl/d
2014 2015 2016 2017
Source: Energy Information Administration (EIA), IFPEN calculation
(2) Chapter 11 refers to a U.S. law that offers protection to companies facing bankruptcy. They are
able to restructure and continue operations under this procedure
3
Possible scenarios
If excess supply is actually absorbed, oil prices will
reach a new benchmark. Gradual reinvestment is
needed to balance the market, following declining
investment during 2015 (-25%) and 2016 (–24%).
A review of production costs seems to indicate that the
$50 to $60/bbl range would be the most comfortable. It
would favor U.S. shale oil production and enable devel-
opment in the Middle East, specifically in Iraq.
However, it remains likely that, given the financial and
geopolitical environment, oil prices will remain outside
this stabilization zone. Uncertainties about demand
should also curb it, along with the level of U.S. produc-
tion. Finally, the somewhat strict implementation of the
OPEC/non-OPEC agreement also demonstrates very
different levels of price pressure. Thus, it is important
to remain cautious regarding future trends.
During 2017, it will be essential to track changes in shale
oil activity, specifically following the likely price increases.
In the case of a significant rise, the OPEC agreement,
which aims to limit the cartel’s production during the first
half of the year, could be challenged. It would become
counterproductive as it favors U.S. producers.
A return to excess supply can not be ruled out. An inevitable
upward trend in oil prices is not a foregone conclusion.
Guy Maisonnier – guy.maisonnier@ifpen.fr
Manuscript submitted on December 20, 2016
2016 OPEC/non-OPEC agreement
The OPEC countries reached an agreement to reduce their
oil production on November 30, 2016, eight years after the
2008 agreement. It was strengthened on December 10
when 11 non-OPEC nations agreed to reduce their produc-
rous objections that had to be overcome.
want to bear the burden alone, Iraq, a war-torn country
reclaim its position following the end of the oil embargo.
It also meant gaining the support of certain non-OPEC
countries, including Russia.
for OPEC countries, won over the parties to a varying
degree, perhaps with the exception of Iraq.
It remains to be seen if its application will be effective. All
countries have an interest in the agreement for budgetary
a look at
Oil situation in 2016 and trends
reasons. Saudi Arabia’s financial reserves are declining, its
budget deficit is growing, which explains the conciliatory
position it ultimately took with regard to Iran. The geopoliti-
cal climate could nevertheless create tensions among
member states and call the agreement into question.
Key phases of the OPEC/non-OPEC agreement
December 4, 2015: 168th OPEC meeting, at which no
agreement was reached while oil prices hovered under
$40/bbl. Iran stated that it would not lower its production so
long as it had not returned to its pre-sanction production levels.
January 18, 2016: the Russian energy minister, Alexander
Novak, stated that his country was ready to take part in a mee-
ting with OPEC on possible cooperation to address collapsing
prices. He referenced a Saudi proposal to reduce each coun-
try’s production by 5%.
February 9, 2016: Iran indicated that it was prepared to support
“any form of dialogue and cooperation with OPEC member
states, including Saudi Arabia.”
April 17, 2016: informal meeting held in the capital city
Doha with 15 oil producer countries, OPEC members and
non-members. It aimed to reach agreement on a production
freeze at January levels, as proposed by Saudi Arabia and
Russia at the start of the year.
June 2, 2016: 169th meeting, relatively calm, discussing ideas
on measures to be taken.
September 28, 2016: Algiers accord to study a cap on OPEC
production between 32.5 and 33 Mbbl/d (170th extraordinary
meeting).
October 14, 2016: informal OPEC consultations with Russia
and Mexico.
October 29, 2016: first meeting of the High-level Committee
created in Algiers.
November 29, 2016: OPEC agreement to reduce production by
1.2 Mbbl/d in 2017.
IFP Energies nouvelles
1 et 4, avenue de Bois-Préau
92852 Rueil-Malmaison Cedex – France
Tel.: +33 1 47 52 60 00
www.ifpenergiesnouvelles.com
December 10, 2016: agreement with 11 non-OPEC countries
to lower their production by 558,000 bbl/d. The Saudi minister
expressed his determine to further reduce production if
necessary.
Consequences of a possible oil price increase
for France
France’s energy costs, tied to oil and gas imports, could exceed
€32 billion in 2016 (with a barrel at $43) at a level between €39
and €46 billion in 2017 (for a price of $50 to $60/bbl)3.
While the total of €39 to €46 billion is generally lower than the
€65 billion seen in 2013, rising energy costs compared with
2016 will still adversely impact buying power in France. This
could result in fuel price increases of c€5 to c€12/l compared
with 2016 excluding the impact of tax (as of January 1, 2017, a
fuel tax increase took effect, inclusive of VAT, of c€4/l for diesel
and c€1/l for gasoline).
On the other hand, rising prices favor increased consumption
due to expectations of higher inflation. This increase could be
moderate if it led to rising interest rates.
It may favorably impact the stock market, given the significant
presence of oil companies in the market indexes. This also
lowers the financial risks faced by emerging countries that
export oil.
Such increases also favor the development of alternatives to oil
and fossil fuels in general. On the other hand, oil prices have
little impact on renewable energy linked to the electricity
sector. In every case, public support remains a key determinant.
Finally, the rising price no doubt favors increased investment in
oil necessary to avoid a shock due to a supply shortfall in the
medium term. It should be noted that France has several
major players in the oil equipment and service sector that
would directly benefit from such increase.
(3) This calculation is based on a relatively weak euro at $1.06. An increase to $1.1 would
lower costs by €1.6 billion. Conversely, if the euro reaches parity with the dollar, costs
would rise by $2.5 billion
IFP Energies nouvelles-Lyon
Rond-point de l’échangeur de Solaize
BP 3 – 69360 Solaize – France
Tel.: +33 4 37 70 20 00