If the goal of the OPEC+ cuts was to boost oil prices, then the deal is clearly failing.
OPEC+ is scrambling to figure out a way to rescue oil prices from another deep downturn. WTI is now down into the mid-$40s and Brent into the mid-$50s, both a 15-month low. U.S. shale continues to soar, even if shale producers themselves are now facing financial trouble with prices so low. Oil traders are clearly skeptical that OPEC+ is either willing or capable of balancing the oil market.
OPEC+ thought they secured a strong deal in Vienna in early December, but more needs to be done, it seems. OPEC’s Secretary-General Mohammad Barkindo wrote a letter to the cartel’s members, arguing that they need to increase the cuts. Initially, the OPEC+ coalition suggested that producers should lower output by 2.5 percent, but Barkindo said that the cuts need to be more like 3 percent in order to reach the overall 1.2 million-barrel-per-day reduction.
More importantly, the group needs to detail how much each country should be producing. “In the interests of openness and transparency, and to support market sentiment and confidence, it is vital to make these production adjustments publicly available,” Barkindo told members in the letter, according to Reuters. By specifying exactly how much each country will reduce, the thinking seems to be, it will go a long way to assuaging market anxiety about the group’s seriousness.
Still, the plunge in oil prices this month is evidence that traders are not convinced. The view is “that the U.S. will continue to grow like gangbusters regardless of price and overwhelm any OPEC action,” Helima Croft, the chief commodities strategist at Canadian broker RBC, told the Wall Street Journal. “Unless there is a real geopolitical blowup, it could take time for these cuts to really shift sentiment.” Related: Interest Rate Hike Hits Oil Hard
While cuts from producers like Saudi Arabia will help take supply off of the market, OPEC might help erase the surplus in another unintended way. Bloomberg raises the possibility that low oil prices could increase turmoil in some OPEC member states. The price meltdown between 2014 and 2016 led to, or at least exacerbated, outages in Libya, Venezuela and Nigeria. The same could happen again.
Just about all OPEC members need much higher oil prices in order to balance their books. Saudi Arabia needs roughly $88 per barrel for its budget to breakeven. Libya needs $114. Nigeria needs $127. Venezuela needs a whopping $216. Only Kuwait – at $48 per barrel – can balance its books at prevailing prices. Brent is trading in the mid-$50s right now.
That raises the prospect of more unrest. Venezuela’s supply losses are assured – and largely already factored into market forecasts – although the rate of decline remains uncertain. But further unexpected outages are possible, and become more likely with lower prices. Libya and Nigeria are the most likely sources of instability. Unexpected disruptions in supply in 2019 could tighten up the market.
Still, while there are many problems facing OPEC+ as it seeks to balance the market, one important factor lies mostly out of the group’s control. Much of the OPEC+ discussion focuses on supply-side dynamics – how much the group should be producing in order to achieve some price target. But the problems sweeping over the oil market right now could be even larger.
Specifically, a global economic slowdown could translate into much slower demand, a problem that OPEC+ cannot fix. Sinking oil prices isn’t just a matter of market expectations of oversupply from U.S. shale.
The financial turmoil and brewing economic slowdown is clearly overwhelming the OPEC+ cuts, as well as the jawboning that some OPEC officials have tried over the past week. Stock markets plunged in recent days after the Federal Reserve tightened interest rates yet again and signaled two more rate hikes in 2019.
There haven’t yet been any dramatic revisions to 2019 oil demand from leading energy forecasters, such as the EIA or IEA. But, then again, the financial instability and the souring oil market have only cropped up recently. The IEA has maintained a 1.4-mb/d growth rate for demand next year, but take that with a grain of salt. Demand revisions could be forthcoming. OPEC+ may have to keep its supply curbs in place for the full year in 2019, but it’s unclear if even that can push prices back up to where they were two months ago.
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By Nick Cunningham, Oilprice.com
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Of course the oil producers in the United States are going to slow production, because they aren't making any money at $45/barrel. Of course demand will increase with oil at $45/barrel, because it is now affordable for the average consumer to use more. Market forces at work.
The OPEC+ production cuts haven't even started yet, and they already haven't worked? Not to mention the cuts Canada just made too. The drop in oil price since the OPEC+ production cut announcement had more to do with a correction in the larger stock markets than the fundamentals of oil.
Just as $100/barrel with the new US production was over exuberant, a belief that oil will hang at or below $45 WTI for very long is an overly pessimistic prediction for oil, market forces will prevent it.
A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply, preventing competition or other restrictive practices.
How could OPEC be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel (Exxon, Mobil, Chevron, Gulf Oil, Texaco, BP & Shell) which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil.
Don’t rush to give a hasty judgement that the recently-agreed OPEC+ cuts are clearly failing. It normally takes a few months before the cuts filter into the global oil market exactly as was the case with the previous cuts which were instituted in January 2017. It took the first half of the year before they started to impact oil prices.
Saudi Arabia will do whatever it takes to get oil prices above $80 a barrel since it wants to avoid another ordeal like the one that followed the 2014 oil crash and also because it needs an oil price higher than $80 to balance its budget. This means that it will be prepared to cut its production drastically in support of oil prices with help from Russia..
The recent slump in oil prices could be attributed to three major factors. The first is the realization by the global oil market that US sanctions have failed completely so far to cost Iran a single barrel of oil and consequently the risk of supply shortage has not materialized despite claims by the overwhelming majority of analysts (yourself included) and investment bankers that Iran will lose 500,000 barrels a day (b/d) to 1.5 million barrels a day (mbd).
The second factor is US manipulation of global oil prices by 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 put an end to this malpractice, OPEC members are well advised to cut all their combined oil exports to the US estimated at 4.7 mbd which have been augmenting US crude oil inventories. They should also adopt the petro-yuan in preference to the dollar since 80% of their oil exports go to the Asia-Pacific region particularly China.
A third factor is that there is still a small glut in the global oil market. This glut was augmented in June when Saudi Arabia and Russia added 650,000 barrels a day (b/d) to the market.
There is a growing feeling that the truce in the trade war between the United States and China will not result in an end to the trade war between them. The root of the problems has less to do with China’s trade surplus with the United States and alleged manipulations of its currency to get trade advantages at the expense of the US and far more to do with China’s meteoric rise on the international scene and the growing importance of the petro-yuan in the global oil trade.
Almost nine months since its launch, the Chinese crude oil futures contract (the petro-yuan) has gone from strength to strength taking a 6% market share from the world’s top benchmarks and most active contracts, Brent and WTI. This achievement is the more impressive given the fact that when Brent futures contract started trading in 1988, it only took a 3.1% share from the then-dominant WTI contract. It is probable that the Chinese yuan will emerge as the world’s top reserve currency within the next decade with the petro-yuan dominating global oil trade.
And while the trade rift between the United States and China has created turmoil in the global oil market, it hasn’t depressed in any way China’s insatiable thirst for oil. China’s oil imports have now exceeded 10 mbd and could even hit 11 mbd before the end of the year.
And while oil prices are currently under intensive bearish influences, I am absolutely convinced that bullish factors will eventually prevail early in 2019 enabling prices to resume their surge.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London