As we head into the new year, OPEC has done its best to create a level of stability for the foreseeable future. Following the latest meeting of its members on 30 November 2017, the organisation announced that its production cuts would be extended until the end of 2018 (with an agreement to review in June). Libya and Nigeria have also agreed to cap their production.
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Although widely expected, the news would have been warmly welcomed by much of the industry. Westwood Global Energy Group warned that without the extension cuts, the market would have reverted to excess supply and potentially lower oil prices this year.1 However, while the decision to extend the cuts should support oil prices in 2018 – both Brent Crude and WTI opened the year at above US$60/bbl for the first time since January 2014 – Westwood argues that a further extension of the cuts may be necessary beyond the end of this year: “If the OPEC cuts come to an end in December , Westwood’s data suggests that the market will be oversupplied until next decade.”
The problem for OPEC, as Deloitte’s John England explains in his take on the ‘2018 outlook on oil and gas’, is that it appears to be “running out of cards.”2 Supply increases (from the US in particular) and slow demand growth have combined to hamper the pace at which the market is rebalancing. England writes: “At some point, the market still needs a real demand boost to get prices moving upward in a meaningful way. Unfortunately, right now, it’s not clear if that card is still in the deck.”
Looking further ahead, OPEC has a difficult juggling act on its hands. Its production cuts are certainly essential to the current recovery, but higher oil prices bring the danger of increased supply from the US. It is becoming increasingly apparent that the timing and strategy of its eventual exit from these cuts will be just as important as its decision to start the policy in November 2016.
Returning to John England’s outlook for oil and gas in the year ahead, it is interesting to note that a whole section of his report has been devoted to the digital revolution. England explains: “In a world where the assumption that energy demand would rise forever seems to be wavering, one path to success is to be a low-cost provider, whether of energy commodities or of the equipment and services needed to produce these commodities and get them to market.” While digital technologies have the potential to be a game changer for those willing to innovate and invest, England warns that the pace of change has the potential to create both winners and losers: “The digital cavalry is coming, but it likely won’t rescue everyone – possibly only those who are brave enough to embrace it.”
This issue of Hydrocarbon Engineering includes a number of articles explaining how digital advancements are helping to improve plant design, enhance operations, increase productivity and revamp maintenance strategies (starting on p. 22).
1. COOK, M. and ROBERTSON, S., 'Westwood Insight: OPEC - Holding Firm, For Now', Westwood Global Energy Group, (4 December 2017).
2. ENGLAND, J., '2018 outlook on oil and gas', Deloitte.