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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The Bullish Truth Of OPEC’s Agreement

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Oil prices jumped 5 percent on Friday after the OPEC+ group announced its vague decision to maintain its collective target while lifting country-specific limits on oil production. The result was viewed as only a modest increase, which could lead to tighter supplies.

Over the weekend, Saudi officials sought to clarify, adding that the move would lead to the increase of 1 million barrels per day. That caused prices to fall back a bit on Monday.

“There’s still some uncertainty in the market as far as how everything is going to start to unwind,” Mark Watkins of U.S. Bank Wealth Management told Bloomberg. “Ahead of that, a lot of people were thinking the worst case scenario as far as OPEC’s going to open up the spigots and oil is going to flood the market again.”

However, the assumption that OPEC is going to flood the market made no sense to begin with, and the result should not be read as a bearish result. OPEC is not going to open the spigot, and if anything, the risk to oil prices is decidedly on the upside. Most OPEC members cannot increase output, even if they wanted to. The oil market may only see 600,000 bpd of extra supply.

That will have only a marginal impact on the market, amounting to less than 1 percent of supply. It would simply offset the declines from Venezuela over the past year. But the declines from Venezuela are not stopping there. They are set to continue, perhaps at an accelerating rate. And they are not the only ones seeing sudden disruptions in supply. Libya temporarily lost 450,000 bpd over the last two weeks and Nigeria is also suffering from lower exports because of pipeline issues. Related: Gulf Of Mexico Production Expected To Hit Record High

Also, the market seems to have forgotten about the expected losses from Iran, perhaps because there is still a lot of uncertainty over how bad the disruptions will be. The latest on that front is not encouraging. The U.S. government has asked Japan to completely halt oil purchases from Iran, a stricter request than what came from the Obama administration. Iran admitted that a lot of buyers won’t receive exemptions from Washington, which could go a long way to curbing Iranian exports.

Moreover, there is always the chance that unexpected disruptions occur elsewhere. News just broke that Canada’s oil exports could fall by 360,000 bpd in July because of an outage at an oil sands facility run by Syncrude Canada.

Most importantly, the sanguine outlook towards the oil market over the next year is largely based on massive production increases from the Permian basin in the U.S., but pipeline constraints could slow growth in Texas.

Meanwhile, Saudi Arabia and Russia are discussing a more permanent framework for cooperation, perhaps some sort of “Super OPEC” in which the OPEC and non-OPEC countries currently cooperating agree to create a parallel institution, separate from OPEC itself, that coordinates oil market policy. Bloomberg reports that the new group could change the one member, one vote policy to something that grants more power to larger producers.

Proponents would cite that bringing Russia and others into an official body would grant the group more influence over global oil markets by folding a greater share of global production under market management. Critics would note that many OPEC members are already producing at maximum capacity, and some of them have falling outputs, which means that their discretion to raise or lower output is a mirage. Also, critics would question the long-term viability of cooperation between so many countries with such disparate interests.

Nevertheless, an expanded OPEC/non-OPEC alliance on an official basis, should it occur, would mark the largest change to oil market management since the creation of OPEC decades ago. Related: This Russian Oil Major Is Ready To Open The Taps

However, even if Saudi-Russian cooperation persists for years to come, it wouldn’t change the fact that the oil market is still tight and the addition of Saudi oil to the market lowers global spare capacity. “The global oil market will likely continue to experience a deficit under most scenarios,” Bank of America Merrill Lynch said in a note. The bank sees Brent rising to $90 per barrel in the second quarter of 2019.

Ultimately, the goal of OPEC and its non-OPEC partners since 2016 has been to drain the surplus and bring the market back into balance. Now, with the market balanced, it would make little sense for them to flood the market. As such, the agreed upon increases are intended “to keep inventories towards more normal levels and not push the market into oversupply,” Goldman Sachs said in a note.

Saudi Arabia, as always, will have the final say on how much oil is added to the market. And with the IPO of Saudi Aramco still scheduled for 2019, there is little chance that Riyadh will preside over another market meltdown. Indeed, any effort to boost production will be aimed at preventing a price spike as more and more barrels go offline around the world.

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on June 26 2018 said:
    Why does every headline on this site always have to be so bullish?
    Oil bears and bulls aside, I look for a more balanced perspective.

    Let's recognize Friday's OPEC+ meeting what it really was:
    To officiate Saudi Arabia's and Russia's increase in production (which increases supply)
    in order to capitalize off that increased market share lost by Iran (not yet though), Venezuela,
    Libya, and Nigeria now that prices are between $25 and $30 a barrel higher than they were last Summer.

    Therefore, they both will increase production to increase their own market share so much that the OPEC production cuts deal will in fact be completely nullified by their actions.
  • Mamdouh G Salameh on June 26 2018 said:
    The only objective of the OPEC/non-OPEC production cut agreement was to eliminate the glut in the global oil market completely in support of oil prices. Therefore the recent agreement by OPEC to increase oil production by 1 million barrels a day (mbd) amounting actually to 600,000 barrels a day (b/d) in extra supply, has, in my opinion, no justification whatsoever.

    Until the time President Trump requested Saudi Arabia to ramp up its oil production three weeks ago in anticipation of a shortfall in Iranian oil exports as a result of US sanctions, nobody not even Saudi oil minister, Mr Khalid Al-falih, spoke of a supply gap in the global oil market. Then suddenly all and sundry started talking about the need for OPEC to increase its production. Even an OPEC technical panel suggest that the oil market could comfortably absorb a production increase without sending oil prices plummeting.

    How could this be true when the glut in the oil market has not yet been eliminated completely yand prices are still hovering around $73-$75 a barrel and not above $80 where they should be if they are to enable OPEC members to balance their budgets.

    Furthermore, nothing has changed in the global oil market in the last three weeks. Venezuela’s slowly-declining oil production and Libya’s erratic production have been constant factors for ages and have been factored in by the global oil market long time ago so there was nothing new there.

    The only thing that has changed is the request by President Trump to Saudi Arabia. For Saudi Arabia, any request from the United States can’t be refused. Through its history, Saudi Arabia has always appeased the United States by quenching its thirst for oil, financing its wars and doing its bidding.

    The fact that the US government has asked Japan to completely halt oil purchases from Iran means that the Trump administration is not sure that the sanctions against Iran will work this time.

    With the petro-yuan providing a viable alternative to the petrodollar and with most of the world particularly China, the European Union and India continuing to buy Iranian crude, the sanctions are doomed to fail. Halting Japan’s and South Korea’s Iranian oil imports amounting to 400,000 b/d will hardy impact on Iranian oil exports as China will happily absorb that loss in no time particularly with a brewing trade war with the United States. Moreover, it will be a great opportunity for China to consolidate the petro-yuan in global crude oil contracts. India could pay for oi imports from Iran in barter trade.

    All in all, Iranian oil exports will not lose a single barrel of oil as a result of the US sanctions. The petro-yuan has virtually nullified the effectiveness of the sanctions.

    As for Saudi Aramco IPO, since the beginning of this year I have been saying that the Saudi government will eventually withdraw it quietly altogether as it no longer needs the money from the sale.

    I have always maintained that the OPEC/non-OPEC production cut agreement will eventually be transformed into a permanent mechanism capable of responding quickly to a tightening in the global oil market or a return of the glut. Furthermore, Saudi Arabia and Russia cooperating in oil issues would grant OPEC more influence over global oil markets. Between them Saudi Arabia and Russia account for 26% and 25% of global oil production and exports respectively.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Don on June 26 2018 said:

    Last reported production by EIA/IEA and others has Venezuela production at 1.40mbpd. Most analysts talk about the continue decline in Venezuela production at the rate of 50kbpd per month for the rest of the year. So by year end production Venezuela could be down another 300kbpd.

    Because of the seizure of assets in the Caribbean and the logistical problems with exports and ship to ship transfers Venezuelan production and exports are already down by another 400k-500kbpd right now. Currently around 800k-900kbpd. Not in six months. Right now! This point is not getting discussed enough.

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