The African oil and gas hangover from 2015 and 2016 - and how it will affect the rest of 2017

It is fair to assume that President Trump will not outdo Obama in 4 years with 79 per cent growth. That would equate to nearly 16.0mn bpd of U.S. oil production. The EIA predicts modest growth in the first two years with U.S. oil production estimated at 9.0mn bpd in 2017 and 9.5mn bpd in 2018. Growing to 16.0mn bpd would require 68 per cent growth in two years (2019-2020) or in six years (2019-2024), the two-year and six-year options depending on whether President Trump wins a second term. Many analysts are not that bullish on the numbers.Opening up new drilling opportunities likely only ramps up US oil production by 1 to 1.5mn bpd, but that could take several years.

OPEC agreed to cut production by 1.2mn bpd for the first half of 2017 to help prices. The oil cartel also coordinated with other non-OPEC producers, headlined by Russia, to boost that cut to 1.8mn bpd. Current data suggests high compliance by OPEC members. Supply from the 11 OPEC members with production targets under the deal averaged 30mn bpd, according to Reuters survey data in January, down from about 31.2mn bpd in December. It is a strong start to the first production cut in eight years. The previous cut in 2009 had an initial compliance rate of 60 per cent.

It is a different story for non-OPEC members. Speaking to reporters in February at a London conference, Mohammed al-Sada, the oil minister of OPEC-member Qatar estimated that non-OPEC members had cut “about 50 per cent” of the total promised. His estimate was followed by a caution that data was incomplete. Yet markets dropped in the immediate period following the announcement.

Russia, a to cording the International Energy Agency (IEA) has cut, as of February, about one-third of its promised 300,000 bpd. As promised cuts were stated to progressively come over the first six months of the year, time will tell if the alliance’s performance will improve.The other non-OPEC members include Azerbaijan, Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan.

Putting everything together, 2017 could see oil struggle to make the imagined gains on the global market. It is more likely that prices hold at US$50 or fall below than push above US$70 per barrel. The supply and demand fundamentals—in particular the obvious production bump—do not point to bullish oil prices. U.S. oil production will surely not hold stagnant, as the country’s independents easily ramp up production when prices see gains, thus likely negating any saving grace from OPEC compliance with production cuts. Growth in global demand furthermore shows little indication of matching (or better yet outpacing) supply in this scenario. The same surplus that doomed the industry in 2015 and 2016 consequently could doom prices in 2017.

But there is a silver lining in the market. Oil and gas simply are not substitutes. The oil supply glut will consequentially become a supply deficit over time. As suppliers pull back on exploration and production, economic growth and demand will gradually return. Companies rightfully invest less today but this opens the floodgate for tomorrow, with the supply gap approaching 20mn bpd over the next 10 years. Expect 2017 (and possibly 2018) to be rough years for oil in Africa. Yet the silver lining may be that 2019 and 2020 will require drastic investment growth to meet supply concerns in the long run. That could be great for Africa, but no African country wants to wait until 2019 (or even the second half of 2018) to feel the reprieve.

Written by Kurt Davis Jr. He is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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