It should be a moment of rejoicing for all OPEC ministers, but for Saudi Energy Minister Khalid Al-Falih, the job is far from done.
In a joint press conference with his Russian counterpart Alexander Novak in Riyadh on Feb. 14, Al-Falih said that OPEC and its allies should continue with their agreed production cuts until the end of the year, even if the market rebalanced earlier.
Al-Falih voiced concern over OECD stocks data and global oil stocks data in general, saying that these figures may not be reliable enough. So it is better to see a slightly overbalanced market — another way of saying a tight market — than exiting the deal early and then realizing that the data is not good and the goal has not been achieved.
Ever since oil prices increased and inventories fell down sharply, there were talks that OPEC and Russian oil companies would consider exiting the cuts deal in June when OPEC next meet. Arguably, Al-Falih is suggesting that exiting the deal this year is not going to happen and media reports on any gradual “exit strategy” by producers should be put to rest.
The deal OPEC has with Russia and others is a golden opportunity that OPEC is trying to seize by looking at cooperation beyond 2018. Why is that? The answer is simple. It is because of shale oil production.
As long as shale oil producers in North America are increasing production, the oil market will always be vulnerable to price swings. It seems that there will be no exit for the producers for the next two to three years, or until shale oil producers run out of steam, and that is not expected before 2022.
The US Energy Information Administration (EIA) has predicted continued development of shale and tight oil and gas resources, which could lead to the US transitioning from a net energy importer to a net energy exporter by 2022. Crude oil production might average above 10 million barrels a day this year, but this level will plateau from 2020 onward.
At last. After a year of pain, the Organization of the Petroleum Exporting Countries (OPEC) and its allies are getting close to reaping the full benefits of their self-restraint on production.
Forecasting the level of growth in US shale oil production is not easy, the EIA said in its annual energy outlook released in February. This is because shale formations “have relatively little or no production history, and extraction technologies and practices continue to evolve rapidly.”
In such a volatile environment, OPEC and its allies must continue to safeguard the market. However, in order to keep Russia and others in the alliance, the structure of the cooperation needs to be amended to accommodate Russian oil companies that operate on a different model than all of OPEC’s state-owned oil enterprises.
A new agreement is in the pipeline, as Al-Falih said in Riyadh last week. A few days earlier, OPEC’s Secretary-General Mohammed Barkindo told reporters in Cairo that Venezuela is proposing a five-year cooperation between OPEC and non-OPEC allies.
But will OPEC succeed in keeping Russian oil companies and other producers in the agreement? We will need to wait and see as any decision on oil policy in Russia comes from President Vladimir Putin. The coordination between Riyadh and Moscow now is impressive and appears promising, but that is not enough because there are many variables and both countries have different long-term energy goals.
Meanwhile, it is interesting to see how the comments of the Saudi energy minister develop and evolve. In March last year, during CERA Week in Houston, Al-Falih said that producers may not need to cut production beyond the first six months of 2017. Later in the year, he emphasized the need for cuts to continue until the goal of bringing down the OECD stocks to the five-year average is met. Now, Al-Falih is saying that this goal may not be achieved and a new definition of a normal level for global oil inventories is needed — and that is what OPEC and Russia will work on until the next meeting of ministers in Jeddah in April.
A few months ago, I wrote a column in this newspaper saying that the goal of bringing oil stocks down to their normal level is going to be a “moving average.” Today, the situation hasn’t changed and the goal of balancing the market will remain a moving target as the purposes behind the agreement keep changing and the market dynamic keeps developing.
OPEC and Russia need to establish a long-term deal and institutionalize the current agreement. The Russian reluctance to commit for longer must be abandoned, and OPEC must be unified, with its members sharing the burden of the deal equally, in order for this cooperation to go forward.
So far, the entire agreement rests on the shoulders of Russia and Saudi Arabia, with the Saudis making the biggest sacrifice among all producers. There are still many gaps to fill in the current agreement, given the situation with Libya and Nigeria. OPEC, therefore, must shape up before going into any long-term deal.
* 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