OPEC agrees to curb oil output

By Kasia Patel
Published: Thursday, 15 December 2016

Oil prices rallied following an announcement by OPEC that it would set a production limit of 32.5m bbl/d.

The Organization of the Petroleum Exporting Countries (OPEC) agreed a deal at the end of November to curtail oil supply for the first time in eight years following a ministerial meeting in Vienna.

Iranian Oil Minister Bijan Namder Zanganeh said that OPEC plans to reduce output to 32.5m barrels a day (bbl/d), compared with an estimated average 33.64m bbl/day in October.

Prior to the official announcement, prices for crude oil rose by as much as 8.8% in London following leaks of the news.

"The OPEC members have initiated a historic and long overdue agreement which will help pave way to stabilise oil futures. This decision will deliver a much needed market rebalance and reduce oil supplies. Oil has risen about 7% today," said Mihir Kapadia, CEO of UK-based investment management firm Sun Global Investments, said at the time.

"As expected, OPEC is also very keen for non-OPEC members to make a contribution of a 600,000 barrel reduction for the benefit of the oil industry. 

This is something that has to be respected and hopefully adhered by the non-members as it is for the largest benefit of all - something which cannot be burdened just on OPEC. We expect oil prices to be on course towards $55 very soon which has been our forecast for end-2016 since February when it was trading at $28 per barrel," Kapadia added.

The deal includes an acceptance that Iran, as a special case, will still be able to raise production. 

Oil prices began a steady decline two years ago as the sector has been plagued by oversupply. 

The reduction in prices has resulted in a decline in rig counts globally and particularly in North America, where less profitable operations scaled back output. 

OPEC has since 2014 failed to implement production caps, following a pump-at-will policy. 

In December last year, crude oil futures slumped to their lowest point in nearly seven years following a meeting held by OPEC, which failed to address production rates in an oversupplied market.

According to the US Energy Information Administration (EIA), crude oil production by OPEC is an important factor that affects oil prices owing to production targets set for member countries.

Impact on oilfield minerals 

Among the materials used in the extraction of oil and natural gas using the hydraulic fracturing (fracking) and drilling processes are industrial minerals such as barite, bentonite, silica (frac) sand, kaolin and bauxite.

The reduction in capex in the US oil and gas industry in particular has severely impacted demand for oilfield minerals over the past couple of years. While an increase in the number of fracking stages and the re-fracking of old wells has offered some respite, until oil prices lift, demand is unlikely to see a substantial rebound.

More recently, proppant suppliers have pointed to signs of a recovery in oil and gas, as while prices for both oil and frac sand remain low, demand for proppants has shown an increase from Q2 to Q3. 

At the start of November, US Silica said the company believes the market bottomed in the third quarter, with indications of early stages of recovery.

"We’ve seen some stability in WTI pricing driving subsequent growth in horizontal rig count," the company’s CEO, Bryan Shinn, said at the time. "Completion activity is picking up and our propriety models indicate a 16% increase in working frac crews over the last 60 days."

However, earlier this year participants at IM’s 4th Frac Sand conference in Minneapolis, US predicted that oil prices would not recover until 2018 owing to excess global supply and the huge global storage overhang, with new supplies on the horizon further threatening the market balance. 

Shift in proppants

The downturn has also propagated a number of shifts in proppant choices over the last few years. Oil and gas producers have looked to increase production efficiency while cutting costs, and ceramic proppant producers were the first to be hit by the downturn as users looked to frac sand.

Since then, the sector has also seen a shift from premium Northern White to brown sand for use in fracking, and while some have argued that this is a temporary move, Preferred Sands’ CEO, Michael O’Neill, does not believe this is a reversible trend.

"You can’t mix all these proppants into the same category," O’Neill told IM. "Ceramic proppants were very expensive and it’s something that producers experimented with and believed they needed, but they weren’t getting better production."

"[Ceramic proppants] will become extinct," O’Neill added.

The shift from white to brown sand is also set to become a permanent fixture of the market, as O’Neill noted that the lowest oil and gas production is still exhibiting growth.

"There is only a marginal difference between the best white sand and a brady brown, so what producers found when they used this sand was that the difference was so marginal that they weren’t getting anything for the additional dollars they were spending," O’Neill said. "The move from white to brown sand? This is not a temporary move, if producers can save money, it makes sense."

According to O’Neill, the shifts seen during the current downturn have left behind a more streamlined oil and gas sector, in addition to a more technically advanced industry.

"Products that take route in this market are quality products – they are effective in a $45 market, and quality doesn’t have to mean expensive anymore," O’Neill said. 

On the sand side, taking into consideration the small difference between white and brown side, O’Neill noted that producers need to have the lowest landed cost instead, while on the technology side, the pressure on proppant suppliers is to demonstrate a real return on product.

"Customers aren’t going to buy a story, they are struggling in the market and they need to compete by taking the same dollars and producing more from that," he said. "It’s all accost game on the tech side, you need to ensure you are creating huge additional production and you’ve got to chase the cheapest barrel of oil."