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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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2019 Could Make Or Break OPEC

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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  • Mamdouh G Salameh on January 03 2019 said:
    The influence of OPEC has closely followed the peaks and valleys of the world's demand for oil. September 14, 2018 marked the group's fifty-eight anniversary — more than a half-century of existence characterized by embargo, conflict, and even war.

    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
  • David on January 03 2019 said:
    Dr. Mamdouh G Salameh I really enjoy your comments to the each of the post on oilprice.com. I scroll down to read your commentary first, then read the article. Thank you.
  • Ryad on January 04 2019 said:
    I have a couple of questions for you Dr Mamdouh, I am familiar with your views on the subject of oil prices and its major key players such as OPEC from your TV appearances in Al-Jazeera channel, your claim about the US data manipulation regarding inventory and shale production in excess of 3 million barrels per day is rather extraordinary for what we know the market seems to believe that there is an over supply of no more than 2 millions barrel and yet we saw what happened to the price of oil in the last couple of months, if your claim is correct then there must be a defecit in production yet neither the market is responding accordingly nor are there queues at the pump, can you please explain this paradox? The other question is regarding the sanctions on Iran which you claim are doomed to fail, clearly no one believes Trump's claim of reducing Iran's export to zero but equally your claim that Iran will not lose a single barrel of export is hard to believe, only China has the clout to ignore the US regarding sanctions, the other major clients of Iran such as India, south korea, japan and even some EU countries can hardly afford to ignore the sanctions unless waivers are extended beyond May rendering them void, as you know the sanctions are wide ranging and affect areas such banking, insurance and shipping and Total, Marsk and Airbus are some of the major companies that pulled out of Iran or froze their major projects, so my second question is how do you justify your claim about Iran not losing a single barrel? ( of course if the waivers are not extended again ).

    Regards

    Ryad

    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.
  • Gerard Remy on January 04 2019 said:
    It is worth remembering that the Saudis and Russia had in 2018 initiated and maintained cuts in crude production well below the threshold they set for themselves i.e without any side cheating on their quotas which served to bolster prices to $80 dollars a barrel. This was only interrupted when the Saudis assisted America by increasing production in face of the latter's sanction against Iran which threatened to take more oil off the markets thus putting strain on fuel prices globally. However Iran was still allowed to export oil in the face of production increases by the Saudis and Russia which cause and immediate tumble in prices to under $50 dollars a barrel.
    Noteworthy, so effective were those cuts in production that maximum out put from American shale made no significant impact in prices.

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