A positive OPEC meeting, but without the desired market reaction
Ministers of the Organization of the Petroleum Exporting Countries (OPEC) met earlier this week and also had consultations with their non-OPEC counterparts. They decided to extend the 1.8 million barrel-per-day (bpd) production cuts for nine months, as was widely expected. Several OPEC ministers had indicated as much during the preceding weeks. Yet the markets did not like the result, and the oil price initially tumbled around 5 percent in Asian trading but later made a recovery.
Markets clearly wanted to see more. When OPEC ministers signaled the dimensions of the deal as early as a few weeks back, oil rallied. When the deal was confirmed, oil fell. It was a classic case of “buy the rumor, sell the fact.”
Whichever way we look at the situation, all of the three big energy agencies — OPEC, the International Energy Agency (IEA) and Energy Information Administration (EIA) — expect markets to balance during the second half of the year, taking the production cuts and demand growth forecasts, of an additional 1.3 million bpd, into consideration. Inventories will go down gradually and over time; this is a marathon, not a sprint.
Yet analysts have mentioned several worries. Some have expressed concerns over the lack of exit strategy, for which there is, in my view, no need, for two reasons. First, we need to see how the supply-demand equation develops over the next six months and then consider corrective measures, where and when they are needed. In the interim, the Joint Ministerial Monitoring Committee (JMMC) reviews the situation on an ongoing basis, meets every other month and can at any time make recommendations.
Analysts were also concerned that the Gulf producers’ output cuts were slow to be reflected in exports. We can expect that to be remedied, once we see the seasonally higher summer demand in Gulf countries.
The agreement to extend the oil production cut by nine months has made things more predictable, which is very important for all the stakeholders in this space.
There was also anxiety over whether Russia will stay the course for the whole duration of the nine months. They will, because they have everything to lose from non-compliance, but stand to gain from meeting the terms of the deal. Russia’s 300,000 bpd cut is half of the overall non-OPEC total. This is a lot in terms of the agreement, but a negligible amount in terms of Russia’s overall production, which exceeds 10 million bpd. Revenues generated from the uplift in price will more than makeup for losses from the foregone production.
There is always anxiety about the incremental production of shale oil. The US shale producers came back with a vengeance when the oil price rose, although shale is relatively expensive to produce. The shale producers more than doubled their productivity over the last few years. However, there are limits to how much the Permian Basin can give and at what speed. Also, the entry of Big Oil into that space may have an impact on the agility because big companies are more bureaucratic and move more slowly than small ones.
The overall oil-output cut agreement has been described as “historic” by OPEC President and Saudi Energy Minister Khalid Al-Falih. He recently said that the production cuts were just one aspect of cooperation between OPEC and the 10 participating non-OPEC oil-producing countries going forward, with a draft framework of cooperation apparently out for review.
All in all, it was pivotal for the deal to be renewed, because it brought stability and predictability to the markets when it was officially announced half a year back. A failure to renew would have sent markets into turmoil. True, the markets did not respond as favorably as OPEC had hoped. But markets will always be volatile and prone to vagaries. We should look at the medium-term trend, and there we are in a good place. The agreement has brought a little more predictability to the market, which is very important for all the stakeholders in this space.
• Cornelia Meyer is a business consultant, macro-economist and energy expert. She can be reached on Twitter @MeyerResources