Oil prices had been falling for two weeks, with Brent dipping below $48 a barrel last week. It has firmed up since then with Brent LCOc1 futures passing the $49 mark in early trading on Monday before dropping slightly Tuesday afternoon. The long positions reflect positive expectations regarding inventories in the near future and a somewhat weaker dollar. Still, it is hard to fathom that Brent stood at around $55 a barrel just two weeks earlier.
As usual, markets were swayed by the US Energy Information Administration’s (EIA) weekly oil stocks data on June 7. It showed that the US inventories had risen by 3.3 million barrels. This was against some analysts’ expectations of a drawdown of 3.5 million barrels. At a conference in Kazakhstan, Saudi Energy Minister Khalid Al-Falih pointed out that there will always be fluctuations in oil inventories and one has to look at the long-term trend. Many analysts expect markets to balance later this year or early in 2018.
The big unknown remains how much the US shale production will ramp up in 2018. The Baker Hughes oil rig count has been climbing for 21 weeks in a row, reaching 741 last week. This is more than double the count a year ago when it stood at 328 rigs. The shale sector has also become more efficient with a rig able to produce roughly 2.4 times the amount compared with a few years back.
The rift between Qatar and some of its Gulf neighbors initially raised concerns in the oil markets. First futures soared, responding to the geopolitical tensions. But ever since shale oil became a factor, the market has seemed to largely ignore tensions in the Middle East. The “geopolitical premium” is all but gone. Even now it only returned for a nanosecond.
As traders contemplated the situation in more depth, some concerns emerged about the validity of the Organization of the Petroleum Exporting Countries (OPEC) output-cut deal in light of the Qatar crisis. Last December, OPEC members agreed to cut production by 1.2 million barrels per day (bpd). Non-OPEC producers decided to take out a further 600,000 bpd, led by Russia and its 300,000 bpd contribution. On May 25, this six-month agreement was extended for another nine months.
Ever since shale oil became a factor, the market has seemed to ignore tensions in the Middle East. The ‘geopolitical premium’ is all but gone.
There is no need for concern that the OPEC and non-OPEC deal might fall apart in light of the geopolitical tensions in the Gulf. The OPEC deal stands, irrespective of what happens in the Gulf Cooperation Council (GCC) and how the diplomatic row evolves.
Al-Falih said as much to CNBC last week when he stated that Qatar was a member of OPEC and a signatory to the 24-country agreement, which had just been extended. He told CNBC that he expected Qatar to abide by its obligation.
The Qatari contribution to the cuts is also rather insignificant. The country produces roughly 2 percent of the overall OPEC output. Qatar is about gas, not oil.
OPEC has seen many ups and downs in the oil markets since its formation in 1960. Countries have joined and left. There were many diplomatic disagreements between member states. At times, they have vehemently disagreed on the strategy and tactics of the organization. There was also the Iran-Iraq war and Iraq’s invasion of Kuwait. These were military conflicts between member states. Throughout it all, OPEC remained a functioning organization.
OPEC is all about ensuring that the markets are adequately supplied with oil. As far as the organization is concerned, this is the greater good and it will take disagreements between member states in its stride. Ultimately this is in the best interest of OPEC, its member states and the oil markets.
• Cornelia Meyer is a business consultant, macro-economist and energy expert. She can be reached on Twitter @MeyerResources.