Chinese oil stocks rise on OPEC output cut

OPEC agrees to drop combined daily output by 3.5 per cent in next year’s first half

PUBLISHED : Thursday, 01 December, 2016, 6:53pm
UPDATED : Thursday, 01 December, 2016, 11:01pm

Shares in Chinese oil and gas producers and their suppliers surged after oil cartel Organisation of the Petroleum Exporting Countries (OPEC) agreed for the first time in eight years to cut its combined daily output by 3.5 per cent in next year’s first half.

Oil and gas companies were the biggest gainers in Hong Kong trading, rising 2.66 per cent on average as a group.

China’s largest oil and gas producer China National Offshore Oil Corporation (CNOOC) was the biggest winner, closing up 6.13 per cent to HK$10.38, while PetroChina followed and leapt 4.74 per cent to HK$5.52. Sinopec Corp was up 2.40 per cent to HK$5.55 and China Oilfield Services shot up 8.57 per cent to HK$7.98.

But analysts cautioned any further upside after the 9 per cent jump in crude oil prices on Wednesday will depend on how well the agreement is implemented, how much output curtailment non-OPEC producers will commit to, and how much shale oil production will be ramped up as a result of higher prices.

“Key uncertainties in the agreement at this stage are the level of cuts from non-OPEC producers such as Russia, and whether the agreement will be continued beyond the first six months of 2017,” wrote Sanford Bernstein senior analyst Neil Beveridge in a note. “Key risks include compliance and the response of shale [oil] producers.”

Shale oil producers primarily refer to producers of oil from shale rock formations in the US, which was made economically viable thanks to drilling technology breakthrough in recent years.

OPEC’s strategy – pushed largely by leader Saudi Arabia – over the past two years in face of rising competition from fast-growing but more expensive-to-produce shale oil, has been to maintain output amid falling prices. It hoped the strategy would squeeze shale oil producers out of the market.

But continuous cost reductions have allowed the latter to survive the prolonged oil price downturn albeit with a curtailed market share, while ballooning budget deficits among OPEC members eventually forced them to give up the strategy and agreed to cut production to balance the oversupplied market.

OPEC on Wednesday agreed to reduce its combined output by 1.2 million barrels a day, the upper end of expectations of 0.7 million to 1.2 million barrels, for six months from January.

It also called for an additional 0.6 million barrels a day of reduction from non-OPEC producers, of which Russia has agreed to cut by up to 0.3 million barrels a day subject to “its technical abilities,” Energy Minister Alexander Novak was quoted by Bloomberg as having said in Moscow.

Shares in the three Chinese oil producers closed 2.4 to 6.1 per cent higher on Thursday, while their services suppliers gained between 4.4 per cent and 10.4 per cent.

West Texas Intermediate crude futures rose a further 0.3 per cent to US$49.61 a barrel in early London trading on Thursday, after jumping 9.3 per cent on Wednesday, the biggest one-day gain since mid February.

Australian bank ANZ senior commodity strategist Daniel Hynes said in a note that he expects the oil price to test new highs for the year at around US$53 a barrel, adding whether it can be sustained at over US$60 next year will depend on the reaction from the US shale oil industry.

Canadian brokerage RBC maintains its view that WTI will average US$56.40 next year.