OPEC And Russia Kick Crude Oil Can Down The Road
Predictably OPEC and Russia have kicked the proverbial crude oil can down the road at their latest ministerial summit on Thursday (30 November). In case you haven’t heard, the oil cartel led by Saudi Arabia, and 10 non-OPEC oil producers led by Russia, agreed to extend their collective crude production cut of 1.8 million barrels per day (bpd) beyond March next year to December.
While initial doubts were expressed over extending the ongoing deal by the Russians, most believed the cuts would be extended. That’s because, in opting to intervene in an oversupplied market 12 months ago and taking on a linear market supply and demand dynamic, OPEC took a leap into the unknown without an exit strategy.
The U.S. shale industry was wounded by OPEC’s earlier stance of keeping the taps open back in 2014. However, the industry wasn’t fatally wounded. Yet, pushed over the edge by the so-called ‘lower for longer’ oil price climate, OPEC blinked and cut headline production anyway in 2016 and managed, at least on paper, to convince non-OPEC participants led by Russia to join in the exercise.
The stated end-goal was to rebalance global oil inventories in developed economies down to a five-year average. So how has it all panned out? Well OPEC’s own research reveals such inventories fell by 23.6 million barrels in September to 2.985 billion barrels; around 154 million barrels above the five-year average.
By that argument, things are proceeding at pace. Yet, at the same time U.S. production continues to rise, currently around 9.4 million bpd, and tipped to rise above 10 million bpd at the very least in 2018. It then begs the question what is OPEC’s exit strategy, if indeed it has one.
That of Russia is simple enough. Its contribution to the ongoing cuts is in any case, in the eyes of some, down to natural well depletion and inventory re-jigging. Both it and other non-OPEC members can simply call it quits. However, for OPEC, it is not all that simple now that Libya and Nigeria, hitherto exempt from cuts, will also partake in the drive.
At the conclusion of the latest and 173rd OPEC ministers’ summit, when asked what the exit strategy was, Saudi oil minister Khalid Al-Falih simply quipped: “Its not as if come December 2018, all 1.8 million bpd worth of production cuts by us would suddenly be dumped on the market as soon as the month ends.”
But what about those barrels in any case? Will lower production from Saudi Arabia and others be the new normal? Perhaps as normal as the oil price that’s likely to lurk in the $55-65 range, with no obvious drivers of demand growth as recently noted by the International Energy Agency.
Let’s not forget, the closer the oil benchmarks get to $70, the more American and other marginal producers are likely to produce oil in incremental volumes. In which case, there will be more OPEC as well as non-OPEC barrels in 2019; even if lower investment could hypothetically ensure there is no crude flood of the sort we witnessed in 2014.
It’s almost as if the latest OPEC and non-OPEC decision is all about managing sentiment in a tricky market purely to maintain prices at the current levels over the near-term. Be that as it may, short-termism never bags sustainable results to complex problems.