January 12, 2017 7:00 pm JST

Oil seen climbing this year amid output cut, surging demand

But US risks threaten to undercut rally

TOKYO -- Last year's landmark agreements to cut crude production have visibly eased concerns of a supply glut, and analysts widely expect prices will continue to be stable even if some oil producers renege on the pacts.

Venezuela last month announced a 95,000-barrel decrease in daily output starting in January. Saudi Arabia, Kuwait and the United Arab Emirates are also slated to curtail production this month.

OPEC and non-OPEC members agreed in December to slash daily production by roughly 1.8 million barrels. Oil-producing nations supplied an excess of 1 million barrels per day between October and December.

Iraq has said foreign oil companies operating in the country have agreed to reduce production. Russia, which is not a part of OPEC, has said major oil companies will curb planned output increases.

The market is reacting to a slighter supply glut. West Texas Intermediate has climbed to the lower bounds of the $50 range but "might test the $60-per-barrel threshold as soon as the middle of the year," said Toshinori Ito, the head of Ito Research and Advisory. Goldman Sachs sees oil rising to $57 in the same time frame.

Oil producers could boost production in secret like they have done in the past, but not many have surplus capacity. OPEC's extra daily capacity amounts to less than 2 million barrels, and Saudi Arabia accounts for 80% of that. The kingdom floated debt on the international bond market for the first time back in October. The terms were set in a way that it would be in the Saudis best interest to keep crude oil prices stable.

Russia has curtailed production at aging oil fields, so the country is also in a poor position to increase output by a wide margin.

Daily demand is expected to grow by more than 1 million barrels, with emerging nations like China and India the main consumers. Excess oil supplies stood at 1.7 million barrels in 2015, but that shrank to 700,000 barrels last year.

Even if oil-producing nations fail to cut output sharply, "The supply-demand balance will eventually head toward equilibrium due to rising demand," said Takayuki Nogami at the government-backed Japan Oil, Gas and Metals National Corp.

But the market is still mindful of two hazards, both in America. Investors are on risk-on mode amid rosy outlooks for President-elect Donald Trump's economic policies. "If those expectations are betrayed, financial products may be sold off, and crude oil might fall below $50," said Ito.

The chilling effect accelerated U.S. rate hikes would have on the global economy presents the other risk. "Not only would it impact emerging economies, which drive demand for crude oil, but financial markets may also become unstable, threatening to undercut crude prices," said Jun Inoue at the Mizuho Research Institute. That scenario would echo the beginning of last year, when WTI crashed close to $26 due to concerns about a global economic slowdown. 

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