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What challenge to Brent oil prices?

Brent spot crude oil prices have started to decline since last week although the average projected $50-60/bbl price range for 2017 haven’t broken out yet. The average Brent oil price has been some $52.60 per barrel since the beginning of March while the first rapid decline occurred on March 9 when the price went down below $51/bbl and it wasn’t the final slump. This week the price fell down even more deeper than last week – $49.21/bbl on March 14. Last time it was the end of November 2016 when the price has fallen to the same level. The highest Brent oil price in March stood at $55.72/bbl while the highest price since the beginning of 2017 was only in February – $56.34/bbl.

Despite the prices are still within the projected corridor, the world energy market is very volatile since not all the OPEC and non-OPEC members are executing the production cut agreement reached at the end of 2016. For example, Iraq, Venezuela and UAE are still very slow toward the agreed oil production cuts. Russia, which is among the non-OPEC countries who agreed to cut, has been declining the production up to 100 thousand barrels per day while 300 thousand barrels per day cut were expected from Moscow during the first half of the 2017.

However, there is still a high probability of reaching out $60 per barrel during the current year if OPEC and non-OPEC countries would strengthen the control on oil production cut. A lot of world energy analysts eye $50-60/bbl for 2017, some of them considers $60-70 per barrel.

 

There is one another big challenge the oil market could meet in the next year when EIA predicts $57.18/bbl for Brent and $56.18/bbl for WTI. Last week EIA said that another type of crude oil to be included in calculation of the Brent price benchmark. The method for assessing the price for Brent is scheduled to change in the next year. The Brent price benchmark reflects transactions involving physical cargoes of several specific grades of crude oil in the North Sea.

‘Declining production of some of the four North Sea oil grades currently used to calculate the Brent benchmark has prompted the price reporting agency, Platts, to announce that cargoes of Norway’s Troll oil will be included in its Brent price assessment beginning in 2018,’ EIA says in its today’s information on its web-site.

As oil production from the Brent field declined from the peak level of some 500 thousand barrels per day 32 years ago, fewer Brent shipments were available for trade. ‘The decrease in cargoes reduced the liquidity of the Brent price assessment, making transactions more difficult. In 2002, Platts responded by including transactions involving two additional grades of oil, Forties from the UK and Oseberg from Norway, in its price assessment for North Sea oil. In 2007, Platts added the Norwegian oil grade Ekofisk. Since then, the Brent oil price assessment has also been referred to as Brent BFOE, with the acronym representing the four oil grades included in the assessment,’ EIA says in its statement.

With continued production declines in the North Sea, annual combined cargo loadings of the BFOE fell from more than 1.4 million barrels per day in 2006 to less than a million b/d by 2012. By 2015, BFOE loadings reached 1.03 million barrels per day but in 2016 they had fallen to 948 thousand b/d. Based on the last year’s loadings, including Norwegian grade Troll will add about 29 percent more crude oil volume to the BFOE price assessment. With the inclusion of Troll, total loadings of the Dated Brent (BFOET) assessed oil grades would be 1.2 million barrels per day in 2016, EIA says.

‘Despite the continuing importance of the Brent price benchmark, actual oil production from the original Brent field will soon end after more than 40 years of production. Shell, the operator of the Brent field, has begun to decommission and remove the offshore oil platforms and the 154 wells associated with the field,’ EIA reports.

Article written by HEI contributor Vagif Sharifov, oil and gas markets research analyst.

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