There may be supply side risks to the oil market in 2017 in the absence of extension of the Opec output cuts or if US production picks up and without extension of the Opec deal, the market could into surplus in the medium term, a report said.

Post Opec’s November agreement to cut production and optimism about its production cut compliance, oil prices rallied, reaching as high as $57.1 per barrel on January 6, added the Oil Market report from Al Rajhi Capital, a leading financial services provider in Saudi Arabia.

However, the recent concerns over inventories reaching all-time highs due to weaker than expected global demand resulted in oil prices touching a four-month low.

“We believe that demand was lower mainly because of seasonal factors, and hence inventory level could decline from its peak once demand picks up,” the report said.

Cash flow of US shale companies broadly improved in 2016, primarily due to oil price recovery and sale of non-core assets, which may have lowered the breakeven oil price on a cash basis. “If we ignore the sale of assets, then the breakeven price could be higher than market expectations,” Al Rajhi said.

With lower rigs and assets for sale, breakeven price is likely to remain higher, which may continue to limit US production going forward unless oil prices increase further. As per Al Rajhi’s analysis breakeven price for US shale producers varies from $42 to $60/bbl across the major US shale plays.

The transportation sector, which accounts more than 50 per cent of the total global oil consumption, continues to be a long term driver for oil demand with Asia playing a vital role. Given the rising population, improving economic environment, better infrastructure and low motorization rate in Asia, demand for new vehicles is likely to continue improving in the coming years, indicating a strong growth potential for the automobile sector, thus boosting oil demand.

China which alone accounts for a third of global automobile sales has been witnessing strong demand for vehicles, growing at 9.7 per cent CAGR over 2012-2016.

“From the point of view of the oil price impact on the Kingdom, we note that the government’s revenue target for 2017 accounts for oil price at $50.3/barrel, which in our view is realistic,” Al Rajhi noted. – TradeArabia News Service