November 25, 2016 - 1:00 PM EST
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S&P Global: Pre-OPEC meeting commentary

LONDON, Nov. 25, 2016 /PRNewswire/ -- As OPEC oil ministers meet in Vienna on the 30th November, the organization's credibility is on the line. Having spent most of the year in discussion, failure to announce an agreement would be remarkable given the reputations at stake. Our analysts from the S&P Global divisions offer their thoughts and insights to help understand the market implications of OPEC's decision:


Herman Wang, OPEC Specialist, S&P Global Platts:

"A deal may very well be likely given the lack of one would signal OPEC's diminished credibility and that several countries and OPEC officials have their reputations on the line. Whether the deal is merely face-saving or durable and significant is the key question.

As always with OPEC, the details of the deal and how it is implemented will be key. That is because OPEC has no formal authority to enforce compliance. Whether non-OPEC producers choose to participate is even less within OPEC's control.

On the one hand, a deal delivering at least 1m b/d cut with the added commitment of non-OPEC producers, particularly Russia, to join in to reduce or freeze production would have a profound impact on market balances and prices. On the other, a face-saving deal involving minimal cuts or a ceiling with no individual country quotas would essentially preserve the status quo of an over supplied oil market."

Tony Starkey, Managing Director of Analysis, Platts Analytics, S&P Global Platts:

"A cut to 33 million b/d probably maintains the status quo -- slowly returning rigs to active status as prices hover in a $50-$55/b range. If OPEC cuts to 32.5 million/d, then we expect prices to reach $60/b next year which should accelerate, to an extent, the already upward trend in drilling activity in the US.

That said, a significant OPEC cut will drain supply much, much quicker than US shale can fill it, so while in the medium to longer term, a prolonged drop in OPEC supply would likely be somewhat filled by increasing US shale output, OPEC would likely succeed in supporting prices in 2017 with such a move. Meaningful increases in US shale output would likely not start to materialize until the latter part of next year in the presence of higher oil prices."


Jodie Gunzberg, Global Head of Commodities and Real Assets, S&P Dow Jones Indices:

"I still don't see a deal heavily impacting the global fundamentals. It may be too little too late and may actually lengthen the rebalancing because OPEC would be cutting from all time high output. Even a fully implemented cut would leave OPEC production near historical highs.

For context, the last time oil markets were so oversupplied, in 2008, it took 6 years for excess inventory to turn to shortage. This time, we are arguably only into the second year of the current glut so rebalancing may take a few more years.

For investors, it's worth noting that we are on the cusp of the longest consecutive monthly contango in Brent Crude, 29 months and counting, as measured by the negative roll return of the index since 1999, and greater negative roll returns reflect higher excess inventory and storage costs. Brent's current negative roll of -2.4% has doubled from October and is the highest since January 2016.

If a deal is agreed and has the intended effect, investors should expect US crude producers to move quickly to fill the gap and boost production. The low oil price forced consolidation to improve efficiencies bringing down the cost of production. The race has changed from a race for land to a race for efficiency. The increase in efficiency should bring the oil production back faster than in 1998 or 2009 – it is said to be roughly 9 months.

Other factors may wreak havoc with OPEC's desire to boost prices. For example, when the US Dollar strengthens, oil is one of the most negatively affected, losing about 1.7% for every 1% rise in the USD. "


Thomas Watters, Managing Director in S&P Global Ratings' Energy Group:

"Ultimately, we do believe the market will balance, but it's going to take a while.

At $50, production in the U.S. starts to increase. Some of the shale plays that didn't work economically start to become more viable as the oil price rises. If oil were to go to $60 a lot more of those shale plays become economically viable.

The low oil price environment has had some consequences as credit quality in the U.S. oil and gas sector has weakened significantly. In the first three quarters of this year, there were 44 defaults and 175 downgrades in the sector, according to S&P Global Fixed Income Research."

Currently, the S&P Global Ratings' Oil price assumptions for Brent are $45 for 2017 and $50 for 2018.

About S&P Global

S&P Global is a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The Company's divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Platts. S&P Global has approximately 20,000 employees in 31 countries. For more information, visit


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SOURCE S&P Global Platts

Source: PR Newswire (November 25, 2016 - 1:00 PM EST)

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