Market unpredictability after oil price falls
The price might have looked a little frothy given that Brent flirted with $70 per barrel last month. That was partly a reflection of the agreement between OPEC and non-OPEC producers gaining traction.
In December 2016 the 14 OPEC countries and 10 non-OPEC producers, led by Russia, pledged to take 1.8 million barrels per day (bpd) out of the market. It took some time, but the inventory overhang is drawing down nicely. The market turmoil, a spike in the dollar, worse than expected fourth quarter earnings by some oil majors and a stock build up in the US for the week ending Feb. 2, all did their bit.
It was an extraordinary week and it will take all markets time to recover.
As always there is a pull and a push on the oil price. The demand outlook remains strong, although weaker than anticipated. OPEC expects global demand for crude to rise by 1.59 million bpd, a slight upward revision from previous months. The IEA is more bearish in its oil market report, warning that non OPEC supply growth might outpace demand growth in 2018. If nothing else, this certainly makes a strong argument for maimtaining the OPEC/non-OPEC deal for the duration of 2018. The divergence between the two agencies is in line with their reports in previous months. If global growth is in line with IMF forecasts at an average 3.9 percent, demand is likely to be robust. There is a question mark over Venezuela and how many barrels will be lost as a result of the country’s precarious domestic situation and potential US sanctions. There are other trouble spots also.
Despite this, US production has been surprising, passing the 10 million bpd mark at the beginning of February. Some market analysts expect US production to exceed 11 million bpd by the end of the year, while others produce more conservative forecasts.
The UAE welcomed the first US crude cargo to the Middle East last December. The US has emerged as a major producer, and the changes in law permitting US crude exports will have an impact on trade patterns as well as on the relative share of the big players in the major markets. However, there is a question mark over the sustainability of growth in shale oil. The IEA described it as explosive. The question is how much more the basins of the Permian and Eagle Ford and their like have to give geologically. Energy research consultants Wood Mackenzie predicted that shale production will rise until 2024, then decline.
Meanwhile, the agreement to co-operate between OPEC and non-OPEC nations is going strong with compliance sometimes above 100 percent. The Saudi and Russian Energy Ministers Khalid Al-Falih and Alexander Novak have taken full control of the process by co-chairing the influential Joint Ministerial Monitoring Committee, which oversees implementation and compliance of the deal. They have started to name and shame non-compliant nations, for instance declaring in January that Iraq and Kazakhstan did not comply.
The deal is needed to bring some predictability to the oil market. While Russia’s willingness to stick to the deal throughout 2018 has been questioned, on Monday OPEC’s Secretary General Mohammed Barkindo assured US cable channel CNBC that Russian President Vladimir Putin had promised Russia would keep the bargain. This makes sense: There is pressure on Novak to release the restriction from Russian producers who sit on close to 800,000 bpd of new capacity. However, Russia stands to gain more from higher oil prices than increased production. In addition, no one is interested in upsetting the apple cart until the presidential elections are over.
The surge in US oil production and uncertainty over whether Russia will stick to an agreement between major oil producing countries are some of the moving pieces in this complex picture
Oil company chiefs welcomed the increased predictability as they need price ranges to make informed investment decisions. During the years of ultra-low oil prices after 2014 they canceled billions of scheduled investments. Barkindo fears there will be insufficient production to meet global demand, when missing production works its way into the system due to canceled investments, which could be as early as 2020.
All in all the cooperation agreement has more or less achieved what it was supposed to do, even if it took longer than expected.
The right track is being pursued on inventories. However, US inventories are expected to grow during the first quarter of this year. This is seasonal. They always do when refineries go into their maintenance schedule and the growth should not cause alarm.
There will also be market vagaries and currency fluctuations, which all will have an impact on oil prices. There will always be surprises with some producers exceeding expectations and others suffering from geopolitical woes. That is par for the course.
In the meantime, the trajectory is what matters, as well as that both Russia and Saudi Arabia are committed to the deal through 2018. After that, the accord constitutes a useful framework for future co-operation between OPEC and select non-OPEC countries, which will stretch beyond the current deal.
• Cornelia Meyer is a business consultant, macro-economist and energy expert.
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