Saudi Aramco (ARMCO) has informed customers in Asia that it plans to increase oil prices for the month of February. In addition, Saudi Aramco is telling its customers that it is lowering crude supply by 7%.
It's not a surprise to us that Saudi is following through with the OPEC deal. Saudi Arabia is expected to cut oil production by 486k b/d, and the cut should directly impact export volumes. Global crude storage has been in decline since March 2016, and we will likely see onshore storage decline more during the first half of 2017.
Other OPEC countries like Kuwait, Iraq, Venezuela and UAE are also expected to cut their proportional amount, according to #OOTT tanker volume analysis and people familiar with the government.
Non-OPEC countries are also expected to follow through on their end of the bargain, as natural decline due to low oil (NYSEARCA:USO) and capex spending forces production lower. Russia's self-reported oil production of 11.2 million b/d is suspect, to say the least, as trader physical flow reports show production closer to 10.8 million b/d. Russia's oil production has historically peaked in December and export volume peaks in April, according to #OOTT analysis.
An analysis of Russia's major oil producing company capex for 2017 shows a modest increase in production from the end of Q4 2016. The average increase is 4% from Q4 2016 to Q4 2017. While we do not have a good view of the entire production capex guidance for 2017, the larger Russian oil companies usually offer a good view as to how much Russia will be able to increase oil production by.
Our analysis of the current oil fundamentals remains very bullish. Onshore storage draws are expected to accelerate in the first half of 2017 and total OECD surplus storage is currently expected to be completely drawn down by Q3 2017. Second half 2017 demand increase is expected to be met partly from US shale production growth of 400k b/d and OPEC spare capacity, with Saudi Arabia maintaining production around 10 million b/d. Due to the availability of spare capacity in the market, oil price rise will be more gradual. We expect to see WTI to move to $60 sometime in the first half of 2017, followed by $70 in the second half of 2017.
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