Oil prices rose on Monday after Saudi Arabia’s energy minister Khalid Al-Falih said he still expected an OPEC-led deal to cut output during the first half of the year to be extended to all of 2017.
“Based on the consultation 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 have had this morning with the Malaysian prime minister,” Falih said during the opening address at the 19th ASIA Oil and Gas Conference in Kuala Lumpur.
The producer coalition is determined to do “whatever it takes to achieve our targets and bringing stock levels back to the five-year average.”
The Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de-facto leader, and other producers including Russia, pledged to cut output by 1.8 million barrels per day (bpd) during the first half of the year to support the market.
But global inventories remain high, pulling crude oil prices back below $50 per barrel and putting pressure on OPEC to extend the cuts to the rest of the year.
Falih said recent price falls had been caused by the low demand season and refinery maintenance, as well as by non-OPEC production growth, especially in the United States.
US oil production has gained more than 10 percent since mid-2016 to 9.3 million bpd, close to levels of top producers Russia and Saudi Arabia.
Despite this, Falih said that markets had improved from last year’s lows, when crude prices fell below $30 per barrel.
“I do believe however that the worst is behind us with multiple leading indicators showing that supply-demand balance is clearly in deficit and the market is moving towards rebalancing. We should, therefore, expect healthier markets going forward,” he said.
Falih said he was pleased to see that OECD stocks have been gradually declining since the middle of last year.
“Floating stocks, for which less data is available, have also declined considerably,” he added.
Falih said he was pleased that OPEC and non-OPEC partners that agreed to the supply cuts are so far exhibiting discipline and adherence to the commitments that were made last December.
He also expected global oil demand to grow at a rate close to last year. In China, oil demand growth should match last year’s due to a robust transport sector, while India should record healthy growth, he said.
The chairman of energy consultancy FGE Fereidun Fesharaki said: “They (OPEC) are looking at (extending) for nine to 12 months. Six months is not enough as we’ll still be well above five years average of stocks.”
ASIA LEADS LONG-TERM GROWTH
With a remarkable growth in population, Asia is likely to drive oil demand growth over the next 25, Falih said, adding that countries such as Vietnam and the Philippines are rising to become included in the top 20 global economies.
Asia will also account for nearly two-thirds of global gas demand, by that time he said.
Global investments in exploration and production have also fallen behind, potentially creating a big supply-demand gap in the next few years, he said.
“Conservative estimates predict that we will need to offset 20 million barrels per day in combined demand growth and natural decline over the next five years,” Falih said.
“That is why I fear … we are heading into a future of supply-demand imbalances,” he said.
To help meet this demand, state oil company Saudi Aramco will invest $7 billion in a refinery-petrochemical project with Malaysia’s Petronas.
Also, Saudi Aramco’s project with Indonesia’s Pertamina to expand the Cilacap refinery will enter front-end engineering design in the second half of this year, Falih said.
Falih dismissed talks that the rise of alternative energy could reduce fossil fuel consumption, saying renewables still face hurdles such as affordability. He does not expect oil demand to peak anytime soon.