WEEKLY ENERGY RECAP: OPEC and IEA fail to factor in global oil supply threat

The logo of the Organization of the Petroleum Exporting Countries (OPEC) sits outside its headquarters in Vienna, Austria. (Reuters/File)
Updated 13 October 2019

WEEKLY ENERGY RECAP: OPEC and IEA fail to factor in global oil supply threat

  • Both OPEC and the International Energy Agency (IEA) see lots of oil supplies through 2020, each flagging similarly pessimistic oil demand growth outlook

Oil prices recorded their first weekly gain in two weeks, driven higher by unrest in Iraq and Ecuador, as well as by optimism over talks between the US and China aimed at ending their trade war. 

The attack on an Iranian oil tanker off the coast of Jeddah overshadowed the latest hints from OPEC about the possibility of making deeper output cuts.

Brent crude finished the week at $60.51 per barrel, while the US WTI measure also advanced to $54.70 per barrel.

Supply disruptions originating from US sanctions on Iran and Venezuela continued to make for a tight spot market even as concerns over slower global growth and the US-China trade war put downward pressure on the market for future oil deliveries.

Both OPEC and the International Energy Agency (IEA) see lots of oil supplies through 2020, each flagging similarly pessimistic oil demand growth outlook that may have neglected the fragility of global spare production capacity.

In their monthly reports, neither OPEC or the IEA factored in concerns about global oil supply threats — even if Saudi Arabia took just 12 days to restore output to pre-attack levels without necessitating the suspension of exports.

The speed and efficiency of the Saudi response may have lulled the market into a false sense of security because if such attacks happen elsewhere, the story could have been very different — with serious supply outages sending the oil price rocketing.

OPEC and the IEA have pumped pessimism into the market that is helping to put downward pressure on oil prices. 

Separately, the US Energy Information Administration (EIA), sharply lowered its oil price outlook as it sees weak oil demand growth more than offsetting the higher risks of supply disruptions after the recent attacks.

It expects Brent to average $63.37 per barrel in 2019, and $59.93 per barrel in 2020. It sees WTI averaging $56.26 per barrel in 2019 and $54.43 per barrel in 2020. 

The EIA forecast US oil production to average 12.26 million bpd in 2019, and 13.17 million bpd in 2020.

However there may be a mismatch here between its expectations of a lower oil price and higher US output because the Permian producers require higher prices than those forecast to sustain capital expenditure.

Hence, such lower oil prices forecast for 2019 and 2020 should see oil production growth trending lower as budgets are squeezed.

S&P Platts Global reported US oil drilling was 19.8 percent lower than a year earlier, while the US oil and gas rig count has also been declining since the end of last year — dipping to 931 lately after a high of 1,233 in mid-November 2018.

Such numbers raise questions over the sustainability of the US shale oil output growth without a corresponding hike in oil prices.


Make or break days for global oil ahead of OPEC crunch meeting

Updated 08 April 2020

Make or break days for global oil ahead of OPEC crunch meeting

  • OPEC, led by Saudi Arabia, were on Thursday scheduled to take part in virtual discussions with non-OPEC members, led by Russia, about a possible deal to revive the OPEC+ alliance
  • On Friday, energy ministers from the G20 nations, under the presidency of Saudi Arabia, will convene in another digital forum that will bring in the third part of the global oil equation – the US

DUBAI: The global energy world, in the midst of crisis as demand slumps to unprecedented levels due to the coronavirus disease (COVID-19) pandemic, faces two days that could make – or break – the oil industry for months to come.
Leading producers from the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, were on Thursday scheduled to take part in virtual discussions with non-OPEC members, led by Russia, about a possible deal to revive the OPEC+ alliance that fell apart in Vienna at the beginning of last month.
Then, on Friday, energy ministers from the G20 nations, under the presidency of Saudi Arabia, will convene in another digital forum that will bring in the third important part of the global oil equation – the US, currently the biggest oil producer in the world.
If no deal is reached from the two days of oil summits, the immediate prospect looms of a further fall in crude prices and, with global storage facilities already filling rapidly, the possibility of major exporters “shutting in” oil fields, jeopardizing future production.
Energy experts say the purpose of the meetings is two-fold: To reach agreement on how to limit the vast quantities of oil that are still being produced even as demand collapses; and to present some kind of united front in geopolitical terms in the face of the biggest economic recession since the 1930s.
The most visible immediate sign of any success from the meetings will be an increase in the price of crude oil on global markets. Brent crude, the Middle East benchmark, has lost nearly half its value in the past month.
The first aim – to try to balance oil supply and demand – is the more difficult. Global demand has fallen by at least 20 per cent from the usual daily consumption of around 100 million barrels, oil economists have calculated.
But, following the collapse of the OPEC+ deal that was putting a lid on supply, all producers have been pumping more crude. Saudi Arabia is producing more than 12 million barrels per day (bpd), a bigger volume than at any time in its history. All OPEC members, as well as Russia, have said they will increase output.
In this stand-off, US President Donald Trump intervened last week to say that he had spoken to Saudi and Russian leaders and that he “expected” a cut of 10 million, possibly even 15 million, bpd.
That looks like wishful thinking. For one thing, it would not rebalance markets. Anas Al-Hajji, managing partner of US-based Energy Outlook Advisers, said: “The amount of the cut is relatively small given the major drop in demand.”
There are also some difficult relationships to smooth over in the OPEC+ alliance. Saudi Arabia and Russia exchanged angry statements last weekend, each accusing the other of starting the oil price war. Iran, with big reserves but hampered by US sanctions from exporting in large quantities, said that it might not take part in the conference.
The choreography of the two meetings also presents hurdles. The US will not be present at the OPEC+ meeting, but American Secretary of Energy Dan Brouillette said he would take part in the G20 event.
Because it is a free-market industry, America cannot order its oil producers to reduce output, but most analysts are agreed any attempt to rebalance global supply would be impossible without a US contribution.
By going first, Saudi Arabia and Russia are “playing blind” without knowing what the Americans are thinking. Neither would want to agree big price-restoring cuts only for US producers – under big financial pressure at current levels – to swoop back into the market.
This week there have been some signs that the Americans are considering their own versions of cutbacks. The biggest US company, Exxon Mobil, said it would reduce capital expenditure on future projects by 30 percent; the US Energy Information Administration said oil production would fall by nearly 1 million bpd this year, in response to falling demand and financial pressures.
But even if the Saudis and Russians cut substantially alongside other big OPEC producers such as the UAE, and the Americans enter a long-term pattern of falling demand, it is still hard to see how cuts could reach the 10 million barrels Trump “expects,” let alone 15 million.
J. P. Morgan, the big US investment bank, said that it expects OPEC+ to come up with combined cuts of about 4.3 million barrels, most of that coming from Saudi Arabia, Russia and the UAE. “If it’s 4.3 million it only puts off the day when global storage gets filled completely,” said Robin Mills, CEO of Qamar Energy consultancy.
Storage facilities are nearly at the brim. Malek Azizeh, director of the premium facilities at the Fujairah Oil Terminal in the UAE, joked that he was going to hang a sign on the terminal gates: “Thanks, but no tanks.”