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The 'dream team' taking control of global oil

Oil prices have been doing well since the start of the new year, surpassing the $70 threshold more often than not. Markets are slowly and steadily rebalancing. Against that backdrop considerable attention was paid to the publication last week of the OPEC and the International Energy Agency (IEA) monthly reports, and even more to the January meeting of the Joint Ministerial Committee (JMMC) administering compliance of the Agreement of Cooperation. The latter is a deal between the 24 OPEC and non-OPEC countries to take 1.8 million barrels per day (bpd) of production out of the market.
According to the IMF, the global economy is set to grow growing by 3.9 percent in 2018. Against that backdrop, OPEC’s report painted a rosy picture, with demand increasing by 1.5 million bpd and non OPEC supply by 1.15 million bpd. The IEA was slightly less optimistic: It attributed downgrading its demand forecast to 1.3 million bpd to higher oil prices. It also predicted non-OPEC supply would grow by 1.7 million. US production would then exceed 10 million bpd by the end of the year and the US would overtake Saudi Arabia in terms of crude production but still trail Russia. The agency used rather dramatic language, warning of the potential for US shale production to “explode” in light of sustained higher oil prices.
The JMMC was a landmark meeting in as much as Russian Energy Minister Alexander Novak reaffirmed the commitment of his country to stay in the OPEC/non-OPEC deal until the end of 2018. Russia’s contribution is 300,000 bpd. His affirmation is important in terms of keeping up compliance and momentum of the agreement. It is particularly noteworthy as Novak faces opposition from some oil company chiefs in his country, who sit on new production capacity that experts estimate is almost 800,000 bpd. They want to produce. On balance the country probably stands to benefit more financially from higher oil prices than from higher production.

One thing remains certain: The growing world population and the ebb and flow of economic growth will ensure that there is demand for the “black stuff” over the next two decades

Cornelia Meyer

Saudi Energy Minister Khalid Al-Falih reiterated that the market was rebalancing, with excess stocks dropping from 340 million barrels to 220 million barrels in 2017. He also noted that the pace of the draw-downs was slowing. While compliance had stood at 107 percent by OPEC’s accounts, Al-Falih named and shamed Iraq and Kazakhstan for non-compliance. The most important takeaway from the meeting was probably Al-Falih’s statement that a framework for cooperation between OPEC and the 10 non-OPEC countries was needed well beyond 2018. Novak and Al-Falih have taken control and are somewhat of a dream team as far as oil markets are concerned. Both have an interest in a stable market outlook and reasonable price levels for 2018 and beyond. The former has a presidential election coming up, and the latter wants to privatise 5 percent of the state-owned oil company Saudi Aramco.
Where do all these divergent views leave us? The cooperation between Saudi Arabia and Russia was sorely needed to enable the process of rebalancing the markets and it is working. A framework for future cooperation is also needed as producers have to deal with the vagaries of the oil markets: global demand, rising and falling production due to geopolitical circumstances (Venezuela, Libya, Nigeria, etc.) and the unpredictability of the entrepreneurial shale space. The US has become a major producing nation and is looking to export both oil and LNG, upsetting old structures. Russia and Saudi Arabia will remain the enduring big producers, however. Shale oil production may well “explode,” according to the IEA. However, there is some doubt as to the geological longevity of these growth prospects. Wood Mackenzie, the international energy consultant, forecasts production growth from that source to last until 2024 and decline afterwards. But the shale space has been good for many a surprise and President Trump has just announced the opening of 47 new offshore leases on America’s coasts.
One thing remains certain: The growing world population and the ebb and flow of economic growth will ensure that there is demand for the “black stuff” over the next two decades. Production may at times exceed that demand and at times be unable to keep up with it. Oil is an ultra-long-cycle business requiring the investment of huge capital sums, with long lead times from investment to production. That alone necessitates a certain degree of predictability and hence cooperation among major producers. Al-Falih and Novak are leading the way. In the 1990s, British Telecom ran an ad on the UK television saying that: “It's good to talk.” Right they were.
  • Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources