Algiers: OPEC and friends decide to look to 2019

As far as the oil price was concerned, last week looked very much like the previous one with Brent flirting with the $80 per barrel mark — breaking through the threshold briefly on Friday — and WTI hovering around $70. Whenever Brent hits that magic $80 threshold a tweet from Donald Trump ensues, asking OPEC to increase production.

Therefore all eyes were on the 10th meeting of the Joint Ministerial Monitoring Committee (JMMC), assessing compliance with the 1.8 million barrels per day (bpd) production cut OPEC and its 10 non-OPEC allies (OPEC+) had agreed in December 2016. The group had overcomplied by 152 percent for May and that has been coming down ever since. Nevertheless markets have been getting tighter due to robust demand growth and the unprecedented drop in production out of Venezuela and expectations of falling Iranian crude exports when sanctions start in November.

There was much speculation that the JMMC would lower the 1.8 million bpd cut by as much as 500,000 bpd. This did not happen and OPEC+ decided instead to work to bring compliance down to 100 percent over the next months. Markets reacted swiftly with Brent rising nearly 2 percent, piercing through the $80 per barrel ceiling yet again in early Monday trading.

In defense of OPEC, the JMMC would have been the wrong venue to increase production beyond the compliance level of the OPEC+ deal. Upping production would require a resetting of quotas within OPEC, for which a full conference of the organization would be the appropriate venue.

More importantly, Saudi Energy Minister Khalid Al-Falih stressed that there was no need for a production increase, because markets were adequately supplied. He added that KSA could bring as many as an additional 1.5 million barrels per day to the market, if that was required. He added that he did not see any refiner having problems receiving an adequate supply of crude.

The US has overtaken Russia as the world’s largest producer and surprised by adding an incremental 79,000 bpd above estimates of shale oil last month

Cornelia Meyer

Al-Falih’s Russian colleague Alexander Novak doubled down on that sentiment in an interview with Bloomberg. He stated that there was much uncertainty surrounding both demand and supply, and that it was unclear what impact trade wars would have on global economic growth. The uncertainties regarding supply were even bigger, because no one knows at this stage how many barrels the Iran sanctions could take out of the market.

The JMMC focussed instead on 2019. It forecasted supply growth of 2.4 million bpd from non-OPEC countries, led by the US. OPEC foresees demand to grow by 1.5 million bpd next year, which would direct incremental barrels into storage — assuming that the market is currently in balance.

The US has overtaken Russia as the world’s largest producer and surprised by adding an incremental 79,000 bpd above estimates of shale oil last month. According to the EIA, US production stood at 10.9 million bpd in August and is said to rise to 11.5 million bpd in 2019.

OPEC+ is also looking at formalizing its framework of cooperation and we should hear more when the JMMC meets again in Abu Dhabi in November. This is a wise move, given the vagaries in the supply and demand picture. If markets are to be adequately supplied, these 25 countries need a fast response mechanism that requires close cooperation.

Here is just how uncertain the outlook is on both the up- and the downside. Trade wars put a question mark over global economic growth. The OECD shaved 0.2 percent of global growth for 2018 due to the uncertainties on the trade front. It is unclear how much oil will be taken off the market due to the new Iran sanctions. According to OPEC’s calculation, Iran’s exports have so far come down by 300,000 bpd. It is anybody’s guess what will really happen come Nov. 4. Libya and Nigeria have unpredictable production due to their domestic political situation. (In August, Libya surprised on the upside by pumping about 950,000 bpd, only to have the headquarters of its national oil company attacked a few days later.)

The economic situation in Venezuela continues to deteriorate, which means that oil production will continue on its downward trajectory. The US will probably surprise on the upside, despiteinfrastructure bottlenecks in the lower 48. Brazil and others also have more to give.

Al-Falih is right when he says that oil markets are adequately supplied. They are tight, but he is on record as saying that he prefers it that way. We now have to focus on 2019. Formalizing the Agreement of Cooperation between the 15 OPEC countries and their non-OPEC friends is the right way forward to ensure adequate amounts of crude flow into the markets. In the meantime, IOCs and NOCs alike need to keep investing to make up for the roughly $1 trillion of scheduled investments, which were canceled or postponed in the middle of this decade due to ultra-low oil prices. If they fail to do so, neither OPEC+ nor the US or any other entity can ensure sufficient production.