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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: What Does the OPEC Cut Mean for Oil Supply, Inventories and Prices in 2017?
December 5, 2016

Conclusion: These cuts are a big deal, and oil prices have more room to run.

As we have emphasized throughout this year, the global oil supply/demand picture was already set to tighten in 2017, due to (1) above-trend growth in global demand and (2) ongoing organic declines in non-OPEC supply. Oil prices, of course, never move in a straight line, and of late they have been pressured by macro issues (e.g., strong U.S. dollar) and temporary surges in production from Nigeria and Libya. Even without last week's decision by OPEC to initiate the first coordinated production cut since 2008, we believe that global inventories were heading for a draw in late 2017.

* Despite the fact that the ''headline'' OPEC plus non-OPEC cut of 1.8 million bpd is roughly double what we think will be the ''real'' impact relative to our pre-cut oil model, a 900,000 bpd supply cut in the first half of 2017 is still a BIG deal.

* That means OPEC's move should have a meaningfully bullish impact on first half of 2017 oil inventories and accelerate the inevitable rise in oil prices. Ahead of initial evidence of how implementation is taking shape, our approach is to assume only partial implementation of the ''headline'' cut, and only for a six-month period. If implementation ends up being more strictly enforced, and/or if the cut ends up being extended into 2H17, that would provide further upside to our oil model.

* More importantly, these cuts put OECD oil inventories on track to drop below a normal level of 30 days of supply by the second half of 2017. Assuming this is correct, the current ~$53/Bbl WTI oil futures strip for 2017 is much too low.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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