Baku heavyweights choose consensus over conflict
Oil prices have had their biggest rally since 2009 with increases of more than 30 percent since last December. Brent traded comfortably above $67 per barrel in Monday’s early Asian trading.
The rally was supported by planned and unplanned supply cuts. First, there were production cuts of 1.2 million barrels per day (bpd) agreed on in December by OPEC+ (a coalition of the Organization of the Petroleum Exporting Countries and 15 allied nations led by Russia).
According to the International Energy Agency (IEA), OPEC compliance stands at a stunning 95 percent. Non-OPEC allies, particularly Russia, have been slower to implement the cuts, but their efforts are gathering pace.
Saudi Arabia has over-complied with the OPEC+ directive. In April, the Kingdom is expected to export only around 7 million bpd, 635,000 bpd below the 7.6 million bpd refiners sought. KSA has reduced its exports to the US significantly. The average of 513,000 bpd in crude exports is the lowest since 1986. This compares with average exports to the US of 815,000 bpd in 2018.
Then there was Venezuela, where production is falling off a cliff as the political and economic situation in the country disintegrates. Last week’s blackout of the electric power grid made it impossible to process crude and load ships. Observers fear that Venezuelan production might slip below 800,000 bpd over the next months.
Finally, there is uncertainty over what happens with the US sanctions on Iran. The waivers that were granted will be reviewed in May. The administration is said to want to force Iranian exports below 1 million bpd. This would constitute a reduction of around 250,000 bpd. The Trump administration is unlikely to reduce the waivers by too much, mainly because the oil prices are at the upper range of the president’s comfort zone. Expect presidential tweets if the oil price spikes much more.
Saudi Arabia has over-complied with the OPEC+ directive. In April, the Kingdom is expected to export only around 7 million bpd, 635,000 bpd below the 7.6 million bpd refiners sought.
In the meantime, demand was weak. The IEA said that the demand increase for the fourth quarter of 2018 was unexpectedly low with 950,000 bpd. The agency still holds firm on its demand forecast of 1.4 million bpd for 2019.
Some observers and Saudi Energy Minister Khalid Al-Falih worry that markets are oversupplied and may remain so for some time to come. The IEA numbers seem to prove him right in as much as OECD stocks rose by 8.6 million bpd month on month in January. This is the highest increase since November 2017. There is also the 2.8 million bpd non-OPEC production increase in 2018, which is forecast to come in at a strong 1.8 million bpd for 2019. The IEA’s five-year energy outlook, which was released earlier this month, also forecasts stronger than expected growth in US shale production.
A question mark hangs over the demand consensus. The IMF has downgraded the growth of global GDP to 3.5 percent for 2019. Further downgrades look possible, when looking at the weak numbers emanating from Europe and China.
This is the backdrop against which oil ministers and technical staff gathered in Baku for a meeting of the Joint Ministerial Monitoring Committee (JMMC), which measures compliance of OPEC+ guidelines. It is chaired by Al-Falih and Russian Energy Minister Alexander Novak.
The two did initially not quite see eye to eye, with Al-Falih asking to extend the 1.2 million bpd production cuts now, because he felt that markets were oversupplied and stocks were building. Novak argued that the ministers did not have significant visibility of the supply and demand picture until the scheduled OPEC+ meeting in June.
Both have a point. Stocks are building and the demand growth looks dicey, but markets need to wait until it is clear to what degree the US intends to extend the waivers to the Iran sanctions. Al-Falih listened to his ministerial colleagues and came around. Going into the JMMC, he said that one should wait until June to see what to do with the OPEC+ production cuts. He even flagged the possibility of canceling the OPEC+ meeting due to take place in Vienna in April.
This discourse proved that OPEC+ is a functioning entity — albeit not yet formalized. Ministers clearly listen to each other’s viewpoints, because they understand that their economies and budgets depend heavily on the international crude markets.
Al-Falih’s comment that he spoke more often to Novak than to some of his ministerial colleagues in Saudi Arabia is telling. Let us not forget that both producers and consumers have an interest in oil prices trading in slightly more predictable ranges. Both have businesses to run and need to make planning assumptions.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources