Understanding current dynamics of global oil markets
Analysts took note when the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, postponed their ministerial meeting to Nov. 30 coinciding with the start of the COP28 meetings in Dubai.
The announcement saw oil prices fall from above $82 per barrel to just above $78. However, it recovered swiftly into the $81-$82 per barrel range. There was a renewed downward trajectory over the weekend. Brent crude futures were down 91 cents at $79.67 a barrel by 1217 GMT on Monday.
What are we to make of the postponement of the meeting from Nov. 26 and the swings in the price of oil?
There are macro forces as well as OPEC interna at work. First, we need to understand that the 2 million barrels per day cut that was agreed upon during the OPEC+ meeting at the beginning of June this year will last through 2024, which should give a certain degree of comfort to markets. But then, markets tend to look at short-term impulses rather than underlying long-term facts. Hence the age-old proverb: buy on the rumor, sell on the fact, which can be reversed at times for oil markets.
Truth be told, markets were weak not on demand, but on increased supply by non-OPEC+ producers such as the US, Brazil, Norway, etc. Indeed, while both OPEC and the International Energy Administration agreed on global oil consumption growing by 2.4 million bpd this year, they vastly differ for next year with OPEC forecasting 2.25 million bpd next year the IEA projects 930,000 bpd. Such divergence, paired with increased growth of non-OPEC+ crude production is enough to insert an element of doubt — which is never a precursor of bullish markets.
Global oil stocks have been building over the last 2 months. In the US, inventories showed a 2023 low in September, just to grow considerably during five of the last six weeks. Growing inventories also never are a sign of bullish markets.
Given where oil markets are now most analysts assume that the 1.3 million bpd extra voluntary cut by Saudi Arabia and Russia will be carried over into the next year. There may even be further cuts across OPEC+ in store. We shall gain clarity this coming Thursday when OPEC+ ministers review the data and decide what course of action to take.
This brings us to the OPEC interna: last June the baselines for African producers — namely Nigeria, Angola, and Congo — were reviewed downward to reflect their actual capability to produce. The Africans did not like it, but Nigeria and Angola agreed to a review mechanism by independent consultants Rystad, Wood McKenzie, and S&P.
Apparently, consensus was not that easy particularly as Nigeria produced 36,000 bpd above its January quota. Well-informed sources indicate that there will be a consensus on Nov. 30.
This leaves us with an oil market with higher than expected non-OPEC+ production and question marks over where the global economy and with it consumption will go next year.
In the meantime, we should acknowledge that OPEC+, which was pilloried last June for its production cuts, was right. For if it were not for the OPEC+ measures oil markets would have been considerably more volatile over the last six months. We should also acknowledge that Saudi Arabia pretty much “carried the market on its shoulders” by bearing the pain of the 1 million bpd extra voluntary cut.
• Cornelia Meyer is a Ph.D.level macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.