The Joint Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC Ministerial Monitoring Committee (JMMC) is set to meet in Russia later this month after the committee’s mandate was broadened in May by OPEC ministers.
The committee is made up of Saudi Arabia, Russia, Oman, Venezuela, Algeria, and is chaired by Kuwait. It now not only monitors the compliance of the 24 oil-producing nations bound by the cuts agreement, but it can also make recommendations, if deemed necessary, to them.
The committee is meeting during a difficult period for the agreement, as many factors are complicating its success.
Firstly, oil prices are falling and looking for a new bottom every day.
Secondly, oil stored globally — believed to be the main reason behind the fall in prices — is falling slowly, and not enough to quicken the rebalancing of the market and recovery in prices.
Third, supply from producers outside the group, mainly the US, is expected to increase by the end of the year (if shale oil drillers manage to keep pumping at losses), adding more concerns about oversupply in the market.
The fourth factor is that Libya and Nigeria, two OPEC members exempted from the cuts agreement, are raising production at unanticipated rates. Libya originally planned to reach a production target of 1 million barrels per day (bpd) by end of the year; it achieved this much earlier but the sustainability of output at that level is still in question. The same goes for Nigeria, which needs more time to stabilize output, due to oil theft and damage to its facilities.
Apart from all the above factors, which are short-term in their nature, the committee is meeting at a time when a significant long-term threat to fossil fuel is becoming more visible. More countries and car manufacturers are announcing big plans to support a boom in electric-powered cars.
Volvo announced this month it is starting a plan to end making combustion-engine cars, while France plans to end sales of gasoline and diesel cars by 2040.
Bloomberg New Energy Finance issued a report on July 6, which stated that in just eight years electric cars will be as cheap as gasoline vehicles, pushing the global fleet to little more than half a billion vehicles by 2040.
Despite all this, there is still time and space for fossil fuel to thrive but it will not be the key fuel, as before, in the transportation sector.
Going back to the JMMC, oil prices are one of the indicators for the success of the current OPEC/non-OPEC deal — and prices are not in good shape.
Brent futures prices went up slightly after the last OPEC meeting on May 25 and reached $52.90 on May 29. It kept falling since then, and closed on July 9 at $46.70, erasing all year-to-date gains. Brent is even at risk of entering a bear market, as it lost 20.8 percent of its value year-to-date. If this percentage remained for another month or so then the bear market is the new reality of prices.
So, the first indicator of the success of the deal is not looking positive, in spite of the historical rate of compliance for the OPEC and non-OPEC producers, believed to be 106 percent in May.
The second indicator, oil inventories, is not giving an accurate picture as it fluctuates in the US and is not as transparent elsewhere. The International Energy Agency (IEA) said in its report on June 14 that the Organization for Economic Co-operation and Development (OECD) commercial stocks rose in April on higher refinery output and imports. They stand at 292 million barrels above the five-year average and are higher than when OPEC decided to cut output. For May, preliminary data suggests stocks falling in Fujairah, Japan, Europe, Singapore and in vessels offshore, but rising in the US and China.
The first major factor that needs attention from the JMMC is shale oil production but OPEC should be least worried about that for now. Almost all the big shale companies in the US reported disappointing financial results in the first quarter and the rig count in shale-oil producing regions like the Permian seems to be slowing down over the last two weeks, with oil prices falling and hurting drillers who are making more holes in the ground than needed by the market.
So what should JMMC recommend? Nothing: It should just wait, as current oil prices are not enough for the shale industry to keep drilling, while oil stocks’ draw in the US are getting bigger with summer demand. If OPEC did nothing and told the market it is not supporting any increase in cuts above what is already agreed on, then the market will recover on its own. OPEC should learn to focus on the future, beyond short-term cyclicality, as more threats, like electric cars, are gaining ground.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi