OPEC cut likely to affect upstream sectors

OPEC's agreement to curb crude oil production for the first time in eight years will have an impact on the upstream sectors of China's oil giants, analysts say.

Domestic oil companies that focus on upstream sectors - oil exploration and production - are likely to see an increase in revenue as the deal reached by OPEC on Nov 30 is believed designed to help bolster global oil prices, at least in the short term, says Wang Lu, an Asia-Pacific oil and gas industry analyst from Bloomberg Intelligence.

"The state-owned China National Offshore Oil Corp, which has more upstream business related to oil and gas exploration and production, will be more exposed to oil prices than its other two competitors - China National Petroleum Corp and China Petrochemical Corp," Wang says.

The impact on CNOOC is likely to be the greatest of the three, with the recovery of oil prices improving CNOOC's revenue and operating income, she said.

CNPC and Sinopec focus more on downstream oil and gas sectors, including refining and marketing, which gives them an edge when the oil price is low, Wang says.

OPEC will reduce output by about 1.2 million barrels per day, to 32.5 million in January.

Oil prices have dropped drastically since the second half of 2014. Oversupply and a sluggish world economy were among the factors that drove prices down.

OPEC produces about one-third of the world's oil, according to Reuters.

However, Wang says it still takes time to tell how big the impact of the move will be in accelerating the industry's recovery.

"A promise to cut is one thing; to deliver it is another," Wang says. "The OPEC agreement to cut output has improved market sentiment and led to a price surge. It will take months to monitor whether OPEC members actually deliver on their promise."

Li Li, energy research director at ICIS China, says that OPEC's decision "will surely have some short-term effect in bolstering global oil prices and helping oil and gas firms in China".

Analysts said soaring oil prices in the next three to five years would be unlikely, considering the current demand and supply situation in the oil market.

US shale oil is likely to return to volume growth next year.

"US shale oil may serve as the stabilizer to oil prices and cap the amount of recovery," Wang says. "All the moving parts, including the OPEC cut and demand growth, make the rebalancing a dynamic process and not easy to forecast."

zhengxin@chinadaily.com.cn

(China Daily Africa Weekly 12/09/2016 page30)