When OPEC+ agreed to begin cutting crude oil production again in December, hardly anyone in the cartel thought the effect of the news on prices would be as lackluster as it turned out to be. It took some time for the fact to sink in that this time too many traders were worried about the future of oil demand and were reluctant to speculate with oil. Now OPEC is facing another tough year, perhaps even tougher than 2016, and it might just need to reduce production even more to make it work.
“Well, J.P. Morgan said prior to the OPEC meeting early December, that if OPEC didn’t really cut by more than around 1.2 million barrels per day, and they did just for the first half, (not) for the full year, that we could gravitate toward ... our low-oil-price scenario, which is $55 Brent for 2019,” the investment bank’s head of oil and gas for the Asia-Pacific told CNBC this week.
“We expect oil markets to remain volatile, in part driven by flexible North American shale production that can ramp up and down quickly in response to changes in investment levels,” ConocoPhillips’ CEO Ryan Lance told Bloomberg, also this week.
North American shale production is, of course, the number-one challenge for OPEC’s plans. Two years ago it was easier: nobody was sure exactly how flexible shale oil production can be so the OPEC cuts worked, helped by a brighter global economic outlook. Now, things are different. Shale production is growing despite the slump in prices and although this may change if prices fall further or stay at current levels for longer, this is far from certain: in the last week of December, after prices have been on the decline for three months, U.S. drillers continued adding rigs. Related: The New Oil Order
Yet it wasn’t just U.S. production that rose last year: Russia’s hit a new record in 2018, at 11.16 million bpd, which made it the second-largest producer after the United States. Saudi Arabia also pumped at a record level of over 11 million bpd in the months that followed the June OPEC+ decision to reverse the cuts to rein in prices. This is the context in which OPEC+ agreed the new cuts, which were 600,000 bpd lower than the ones agreed in 2016. No wonder skepticism is rife.
Some analysts believe that once the cuts enter into effect, which they did at the start of the new year, the effect on prices will come to be felt. But JP Morgan’s Scott Darling may just turn out to be right: yesterday, news that Saudi Arabia had reduced its crude oil exports by half a million barrels daily pushed up prices only briefly before both Brent and West Texas Intermediate faltered and slid down again.
While six months may be enough to reduce the combined output of OPEC and its partners by the agreed 1.2 million bpd, if U.S. production continues to grow at the current rate, it would likely offset this cut completely. True, the amount of crude that is added or leaves the global markets is not the only factor that counts: the type of crude is also important, and U.S. oil is overwhelmingly light crude, while there is also global demand for heavier grades that the Middle East and Russia produce. Yet grades are rarely the top concern of traders when they hear words like “oversupply”. Volatility, as Conoco’s Ryan Lance said, is clearly here to stay and will likely intensify in the coming months. OPEC might just be forced to extend the cuts it agreed in December if a positive effect from this agreement fails to materialize soon.
By Irina Slav for Oilprice.com
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Still, OPEC will definitely take any new challenges this year in its stride and as always emerge triumphant.
By cutting an estimated 639,000 barrels of oil a day (b/d) from its exports in December 2018, Saudi Arabia was signalling to the global oil market its determination and that of OPEC+ to defend the oil prices and that the recently-agreed cuts of 1.2 million barrels a day (mbd) from January 2019 onward are going to do the trick and reduce the glut in the market.
2019 will see a resurgence in oil prices beyond $80 a barrel underpinned by global oil fundamentals that are still virtually as robust as in 2018 with the global economy projected to grow at 3.8% in 2019, the global oil demand also projected to add 1.4 mbd in 2019 over 2018 and with China’s demand for oil continuing to rise unabated.
However, a bearish element may still be at play in 2019, namely the failure of US sanctions to cost Iran the loss of even one barrel from its oil exports leading the global oil market to realize that there will not be a supply deficit in the market despite projections by a majority of analysts and investor bankers that Iran will lose between 500,000 b/d and 1.5 mbd.
Moreover, US sanction waivers will most probably be renewed in May this year if only to be used by the Trump administration as a fig leaf to mask the fact that their zero oil exports option is out of reach and that the sanctions are deemed to fail.
The impact of US shale oil on the global oil market has little to do with claims about rising shale oil production and a lot more to do with US manipulation of oil prices.
Claims about explosive growth of US shale production are pure hype reminiscent of the hype. The US Energy Information Administration's (EIA) claim that US oil production reached 11.7 mbd is overstated by at least 3 mbd made up of 2 mbd of liquid gases and 1 mbd of ethanol all of which don’t qualify as crude oil. In fact International Exchanges around the world don’t consider them as substitutes for crude oil. And if the International Exchanges don’t accept them as substitutes, then they are not crude. Therefore, US oil production could have been no more than 8.7 mbd in 2018.
Whatever say the US has in the global oil market emanates from its manipulation of oil prices through the EIA’s falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies.
To mitigate the impact of such malpractice, OPEC members should seriously consider reducing if not cutting altogether all their oil exports to the US estimated at 3.2 mbd which have been augmenting US crude oil inventories. They could also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
PS. I am an individual investor who is heavily exposed to oil stocks, i have seen most of my gains of 2018 erased, some of these gains amounted to more than 100 percent which testifies to the level of volatility.
Noteworthy, so effective were those cuts in production that maximum out put from American shale made no significant impact in prices.