OPEC+ efforts slashed oil market volatility by two-thirds, study finds

Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman and Russian Energy Minister Alexander Novak at the start of an OPEC+ meeting in Vienna, Austria, December 6, 2019. (Reuters)
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Updated 11 June 2020

OPEC+ efforts slashed oil market volatility by two-thirds, study finds

  • The research finds that between 2017 and 2019, the actions of OPEC+ reduced monthly oil price volatility by 64 percent
  • The research also outlines how market reaction to each shock can be magnified by the inelastic nature of crude oil demand and supply

RIYADH: The efforts of major oil producers within OPEC+ to stabilize prices curbed volatility by more than two thirds a new study has found.
It looked at both the impact of the Organization of the Petroleum Exporting Countries (OPEC) over the last 50 years as well as the group known as OPEC+ which was created in 2017 and includes other major producers such as Russia.
The study was co-authored by the King Abdullah Petroleum Studies and Research Center (KAPSARC) and published by the International Association of Energy Economics. 
The research finds that between 2017 and 2019, the actions of OPEC+ reduced monthly oil price volatility by 64 percent.
Between 2001 and 2014 OPEC’s attempts to stabilize the oil market reduced oil price volatility by at least a quarter and by as much as half.
The peer-reviewed research paper, titled “OPEC’s Pursuit of Market Stability” concludes that OPEC’s use of spare capacity has achieved a significant reduction in oil price volatility, especially during the more recent OPEC+ period.
The study highlights the challenges of achieving stability in world oil market, with disruptions to demand and supply being both large and frequent and originating from multiple sources such as war, natural disaster and financial crisis. 
The research also outlines how market reaction to each shock can be magnified by the inelastic nature of crude oil demand and supply. This means that in the absence of market intervention, large price movements are required to close relatively small gaps in the market.
For many years, OPEC in general, and Saudi Arabia in particular, has sought to offset market shocks, the most recent example being Saudi Arabia’s attempts to respond to the COVID-19-induced oil market crisis.
According to the paper, OPEC’s spare capacity, the majority of which is held by the Kingdom, has been sufficient to avoid major outages for much of the group’s recent history.
The study found that OPEC’s efforts to stabilize the oil market increase global GDP by an average of $175 billion annually (around 0.2 percent of the world’s GDP) — with the greatest benefits accruing to oil-intensive economies.
The authors’ analysis also addresses the development of shale oil and its impact on the market, finding that it has not significantly reduced the need for OPEC’s spare capacity. 
Shale only accounts for a small amount of non-OPEC supply, 11 percent as of 2019, and so its impact on the elasticity of total non-OPEC supply is limited, despite the fact that its short-run price elasticity is much higher than that of conventional oil.
KAPSARC was founded as a non-profit institution for independent research into global energy economics. It brings together an international group of expert researchers of more than 15 nationalities. Located in Riyadh, the center was established by the Saudi Council of Ministers, and its facilities were opened in 2013.


Iranian oil in perfect storm of storage shortage, low demand, sanctions

Updated 27 min 43 sec ago

Iranian oil in perfect storm of storage shortage, low demand, sanctions

  • Coronavirus, US economic action sees inventories reach bursting point

LONDON: Iranian oil production has reached its lowest point in almost four decades, according to industry experts, with the country’s storage facilities fast approaching full capacity.

The news comes amid a dip in Iran’s oil exports due to a crash in global demand, and in a period when its refineries have been hampered as a result of the coronavirus outbreak.

With over 11,000 confirmed fatalities, Iran has suffered the worst coronavirus outbreak in the Middle East, affecting all areas of industry. 

This has created a perfect storm for the country’s vital oil sector, with what little selling ability it has further disrupted by sanctions imposed by the US in 2018 following Washington’s withdrawal from the Iran nuclear deal.

Iran’s total liquid production dropped from 3.1 million barrels per day (bpd) in March this year to 3 million bpd in June, according to FGE Energy, which predicts that the figure will drop by an additional 100,000 bpd in July.

Crude production was as low as 1.9 million bpd in June, the lowest since the beginning of the Iran-Iraq war in 1981.

Exports also fell, with estimates varying depending on source — 100,000 bpd in May according to market intelligence firm Kpler, and around 210,000 bpd according to FGE — well under 10 percent of the 2.5 million bpd Iran exported in April 2018.

Iran’s onshore crude stocks, meanwhile, hit 63 million barrels in June, having been just 15 million barrels in January, according to FGE.

Kpler said Iran averaged 66 million barrels in storage throughout June, meaning that around 85 percent of the country’s total onshore storage capacity was full.

“However, it will technically not be possible to fill tanks to 100 percent, given technical constraints at storage tanks and potential infrastructure bottlenecks,” Homayoun Falakshahi, a senior analyst at Kpler, told Reuters.

Offshore the story is much the same, with options running out fast. Iran has 54 crude oil tankers, according to valuations specialist VesselsValue, and is thought to be using around 30 ships, mainly supertankers with a maximum capacity of 2 million barrels of oil each, to store over 50 million barrels of crude and condensate.

“The exact number of Iranian vessels on floating storage is a bit of a black box as they have all turned off their AIS (tracking transponder) signals,” said a spokesman for shipping group NORDEN.

“Storage is expected to continue as we do not see these vessels being able to trade anytime soon.”