Oil prices may recover faster than previously expected, if the latest OPEC production cuts are delivered, according to a report published Thursday by Fitch Ratings.
OPEC’s agreement to cut production by 1.2 million barrels of oil per day, and a potential agreement to cut production with non-OPEC countries, “should help accelerate market re-balancing and increases the chances of more rapid oil price recovery than previously expected,” the report says.
The agreement to curtail oil supply represents the first significant intervention to support prices since 2008, the report adds, and “is likely to result in a much quicker market re-balancing, which may be further accelerated by the agreement with non-OPEC participants.”
Even if that deal doesn’t materialize, the OPEC commitment by itself could end market oversupply, starting in the first quarter of 2017, the report notes.
However, implementation risks remain, according to the report, including whether OPEC adheres to the agreement, which has happened in the past. “These issues and US oil production dynamics will be key drivers of the oil price direction in the medium term,” it says.
“The deal has not changed our view on long-term oil prices, which we believe are more driven by the marginal cost of supply,” the report concludes. “Costs vary enormously over time, with geology, geography, engineering solutions, and the demand-supply balance in services markets major contributors. Our latest full-cycle costs research suggests that US$65 is a reasonable estimate.”