Energy ministers’ meeting in Jeddah will reveal key clues about current thinking

Energy ministers’ meeting in Jeddah will reveal key clues about current thinking

Last autumn I argued that oil markets were in the process of balancing and we were seeing the geopolitical premium returning to the market. 
By now markets have rebalanced and the geopolitical premium is back with a vengeance. 
The price of Brent crude reached $72.02 last Friday amid rising tensions in Syria. WTI rose $3.41 over the week and ended at $66.95, despite an increase in domestic US crude stocks. 
Even the International Energy Agency (EIA) acknowledged that OPEC and its 10 non-OPEC allies achieved their mission to clear up overblown inventories. 
In December 2016 they had agreed to reduce production by 1.8 million barrels under the “Agreement of Cooperation.” Compliance was stunning. It stood at 163 percent for the month of March. As a result OECD inventories now only stand at 30 million barrels above the five-year average. 
Saudi Energy Minister Khalid Al-Falih is trying to create a more enduring framework beyond the tenor of the Agreement of Cooperation which is currently scheduled to run through the end of the year.
This will certainly be on the agenda when energy ministers arrive in Jeddah later this week for a meeting of the Joint Ministerial Monitoring Committee (JMMC) which is designed to ensure compliance with the agreement. 
The ministers should be pleased with what they have achieved so far. However, they have to look forward into an uncertain world. With upside and downside pressures for the oil price, there will be much to be discussed in Jeddah.
On the upside, we do not know how much Venezuela will be able to produce amid its internal turbulence. 

Saudi Energy Minister Khalid Al-Falih is trying to create a more enduring framework beyond the tenor of the Agreement of Cooperation which is currently scheduled to run through the end of the year.

Cornelia Meyer

Other OPEC members such as Libya and Nigeria are also good for a surprise on the up as well as on the downside. 
Geopolitical tensions in the Middle East and sanctions on Russia could mean further upside for the oil price. 
Demand increases seem steady, with OPEC predicting 1.65 million barrels per day (bpd) and the IEA forecasting 1.5 million bpd for 2018. 
These numbers seem assured as the forecast for global economic growth still stands at 3.8 percent. Given that the inventories situation is getting tighter, these supply shortages and demand increases can matter.
On the downside, there is uncertainty over just how much incremental non-OPEC supply will reach the markets. 
The IEA predicts 1.8 million bpd, but that could increase depending on how much more shale production will expand as oil prices rise. 
There is also the worry about potential trade friction. According to my model, 1 percent decline of global GDP could take out between 650,000 and 700,000 bpd. 
Al-Falih and his Russian counterpart Alexander Novak will need to steer the conversation to come up with an assessment of what is needed to keep the inventories at this level. 
Al-Falih has mentioned previously that he is comfortable with a tight market. As for bringing a new, lasting framework of cooperation between OPEC and the 10 non-OPEC countries — much will depend on how Russia looks at the cooperation in the aftermath of sanctions. 
On the one hand, domestic producers are exerting pressure on Novak to accommodate about 700,000 bpd of new capacity. On the other, Russia is very interested in a higher oil price — especially as sanctions begin to bite.
Next weekend we will know which way the deliberations have swung.
 

  • Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources
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