The oil market and analysts already largely expect OPEC to extend the production cut deal beyond March 2018, which many feel would finally rebalance supply and demand.
OPEC’s new tagline is indeed all about restoring oil market stability and sustained stability in the global oil industry—these, OPEC says, are its main policy drivers.
While the organization is said to favor extending the deal throughout 2018, and as its leader Saudi Arabia continues to spray the market with its ‘whatever it takes’ promises, now major international oil companies—which have gone to hell and back after the oil price crash from 2014—are sounding the battle cry for the deal’s extension.
It’s not only OPEC economies that need oil market stability; Big Oil, too, needs a floor under oil prices, as it has planned for around-$50-oil in near-term budgets. And the higher the oil prices, the better the chances that major oil companies will be able to pay out dividends with proceeds from operating cash flow instead more borrowing.
“It is better to keep a stable policy and I think the OPEC and non-OPEC agreement is working efficiently and should continue,” Patrick Pouyanne, the chief executive of Total, told CNBC last week. The manager of one of Europe’s big oil companies believes that OPEC should give more visibility to the market to restrain the “huge volatility”.
On Friday, Total reported a solid set of Q3 results, but said that “Markets however should remain volatile given the uncertainties in supply, and inventories, while falling, remain high.”
“The pre-dividend organic breakeven for the Group (excluding acquisitions-divestments) will be below 30 $/b in 2017 and should continue to fall to 20 $/b in 2019,” Total noted.
BP chief executive Bob Dudley concurs with his colleague at Total and told CNBC: “I heard what Patrick said about the volatility of oil and the factors here and I couldn’t agree with him more… Short term exuberance does not characterize I think any of the CEOs that I know in oil and gas right now.”
Referring to OPEC extending the production cut deal, Dudley noted that “all the signs and signals to me are that they’re cohesive and I think it’s probable, although I don’t have any special insights, that they would extend their agreements.”
BP is reporting Q3 figures on October 31, but at the Q2 results presentation in August Dudley said that BP was continuing to plan for a lower oil price world, and “I’m not expecting big shifts in prices anytime soon and a price of $50 a barrel looks like the right number to plan on for the rest of the decade.” What the lower-for-longer means for BP is that it must plan on consistently low oil prices. “Our break-even levels need to sit below $50 a barrel and, in about five years’ time, under $40 a barrel,” Dudley noted.
Claudio Descalzi, CEO of Italy’s Eni, also weighed in. “I think that OPEC need to keep this position,” Descalzi told CNBC. “It’s not just to balance supply and demand…but also to give an assurance to all the investors,” the manager noted. Eni places the ball squarely in OPEC’s court, saying that long-term investments need a body—in this case OPEC—that is “able to interact positively with the market to balance supply and demand.”
Last week Eni said in its Q3 results release that it expects to, in 2017, “achieve organic coverage of investments and dividends, entirely paid in cash, at a Brent price of 60$ a barrel as planned, or 45$ a barrel when taking into account our dual exploration model initiatives.” The dual exploration model means selling minority stakes in oil and gas fields to other operators, like Eni did with the giant gas discovery Zohr in the Mediterranean.
Big Oil has shaken off the worst of the oil price slump, and this year it has started generating more cash instead of burning it, in a sign that they have been adapting to the lower-for-longer oil prices. Nevertheless, Big Oil CEOs would welcome a stable floor under the price of oil and reduced volatility in the market.
By Tsvetana Paraskova for Oilprice.com
