This article first appeared in The Edge Financial Daily on May 9, 2017

KUALA LUMPUR: Oil and gas consultancy firm FGE founder and chairman Dr Fereidun Fesharaki forecasts that a production cut untill year end by Opec and several non-Opec members is still not going to be sufficient in stabilising oil prices at US$50 (RM216.50) to US$60 a barrel, as inventory is expected to continue to rise from a build-up of US volumes.

As such, Fesharaki warned that crude oil has a downside risk of declining to as low as US$40 per barrel. “Opec has done a remarkable job in compliance with agreed cuts. The policy is balanced between market share and market management, while demand growth was very solid at 1.5 to 1.6 million barrels per day, helping a move towards a balance.

“Oil prices of US$50 to US$60 per barrel might be sustainable. However, with the build-up in US volume higher than expected, there is a downside risk of prices sinking to the low US$40s over the next 12 months,” he told the audience at the 19th Asia Oil and Gas Conference 2017 yesterday.

“[So] extending [the cut] to end of the year is not enough,” Fesharaki said. “It needs to be longer and [with] more cuts, maybe another 500,000 to 700,000 barrels a day (bpd),” he added.

Earlier yesterday, Saudi Arabia Energy, Industry and Mineral Resources Minister Khalid al-Falih said the agreement between Opec and non-Opec producers could be extended. “The producer coalition is determined to do whatever it takes in bringing stock levels to the five-year average. “Based on the consultations I have had with participating members, we are confident that the agreement will be extended to the second half of the year and beyond,” al-Falih said during his opening speech at the same event.

The agreement, implemented on Jan 1, sought to cut production by 1.2 million bpd for the first half of 2017, with non-Opec countries agreeing to cut output by 556,000bpd.

At a press conference later, Petroliam Nasional Bhd president and chief executive officer Datuk Wan Zulkiflee Wan Ariffin said the state-owned oil producer is committed to continuing with the agreed production cut, in the event the arrangement is extended. “We have committed to a 20,000 barrels per day cut and that’s our commitment. If there is an extension of the agreement, of course we are committed to continue with the same production cut,” said Wan Zulkiflee.

However, Fesharaki is concerned that rising production from the US oil supplies, coupled with prolonged weaker demand, might result in Opec giving up on market management. “The market is watching carefully [for] when the build-up of inventory stops and draws begin. Opec’s dilemma now is that if oil prices go above US$60 per barrel, demand will weaken and new supplies will appear. What if prices stay below US$50 per barrel? More cuts? Who will cut?” he asked.

Al-Falih himself had noted in his speech that certain factors have slowed the impact of production cuts, namely the slow season of demand, planned refinery maintenance in the US, growth in non-Opec supply — especially in the US — and the actions of financial players in the market.“

Regardless, al-Falih believes “the worst is clearly behind us”. “With multiple leading indicators showing that [the] supply and demand balance is in deficit, the market is moving towards rebalancing. We expect a healthier market going forward,” he said.