Why Saudi Arabia will cut production and oil price will reach 70 dollars

Amrita Sen, Chief Oil Analyst at Energy Aspects, believes oil prices could hit 60 dollars a barrel as early as the second quarter of 2017. Why? OPEC will honour the cuts agreed on 30 November, led by Saudi Arabia, who has realised it needs higher global oil prices in order to induce domestic transition and to prevent a severe supply crunch in the coming years.

The OPEC decision to cut output was the topic at the forefront of the discussion at Amrita Sen’s recent oil market outlook delivered exclusively for some of ONS’s partners and industry leaders. Sen is concerned with the decline in production, and believes the record high inventories may be used up quicker than do most other analysts.

Saudi Arabia will cut production
Although there is a lot of scepticism in the market, Sen believes Saudi Arabia will honour the recent OPEC agreement and do its part.

“For the first time in the history of this industry CAPEX is going to be down for three years in a row: next year CAPEX will be down again. For the Saudi’s this knowledge came with the realisation that 100 dollar oil is as bad for them as is 30 dollar oil – For oil producing nations, creating a balance between the greater renewables substitution of the high price environment, and the devastation of lower CAPEX in a low price environment, is crucial. A middle ground is best for them.” Sen says.

According to Sen, Saudi Arabia has also realised it needs a higher oil price than today to strengthen its other industries.

“Mohammad bin Salman, the deputy Crown Prince, wants to move Saudi Arabia away from from oil dependency and towards more sustainable energy by 2030. Although, initially he said it does not matter if the price of oil is at 15 or 70 dollars he has since realised that a higher oil price today is the only way he is going to get the economy away from oil-dependency and strengthen the private sector.”

Long term oil price at 70 dollar
“Long-term we see oil steadying at 70 dollars a barrel. At 70 dollars everybody’s happy. You get enough IRR (Internal rate of return) for companies to go back into drilling, and consumers are happy as well. But this market is either oversupplied or undersupplied, it is never exactly in equilibrium, so you can still get the mini cycles. Looking ahead at the long-term beyond the recent cut, we don’t see another four-year era of 100 dollar oil. Later on in 2017, we think prices will probably stabilise at around 70,” Amrita Sen concludes. (Article continues below)

Video: Amrita Sen at ONS 2016: Oil demand forecast

Harder times ahead for Europe in 2017
With bonds strengthening between Vladimir Putin and Donald Trump, Amrita Sen is believes that Europe faces a difficult time ahead. The Chief Oil Analyst would not be surprised if the US sanctions on Russia are lifted, which would also affect the global oil industry.

“One of Trump’s major focuses is ISIS, and he believes he can work with Russia to get rid of this threat – but he is seemingly not as interested in maintaining other geopolitical relationships. Europe is in a very difficult position. The upcoming elections are due to cause a lot of uncertainty given the rise of anti-establishment sentiment, and the Euro is weak. I fear that Europe is getting more and more isolated, because clearly Putin now has a huge impact in the Middle East, and he is clearly forging ties with the US as well.”

Useful links
Read more about Amrita Sen and Energy Aspects here

More videos from ONS 2016