The OPEC/ non-OPEC JMCC meeting in Algiers has provided a very diffuse outcome.
Oil markets seem to be heading to a state of instability, as oil supplies come under severe pressure in the coming months. The world’s leading oil cartel seems also to be under pressure, as internal conflicts and possible in-depth cooperation with Russia could lead to a restructuring of the old giant.
The outcome of the JMCC meeting between OPEC and Russia has produced a diffuse result. Saudi Arabia, OPEC’s leading oil producer, and Russia seem to have rebuked U.S. president Donald Trump’s request to increase overall oil production to counter higher oil prices.
In a direct remark, Saudi’s minister of energy Khalid Al Falih stated that OPEC is not interested to increase prices as was stated by Trump. The U.S. president even had warned to take action if the oil cartel continued with its so-called strategy to squeeze the market to gain higher revenues. The Algiers answer was clear, production won’t be increased, except if the market shows a severe tightening. The cartel seems to be taking a very interesting position, as this means that OPEC and Russia will decide when to act and how to act.
At present, OPEC sees not yet a real need to supply additional volumes at all, as stocks are still above the 5 year average. Russia and Saudi Arabia repeated their claims that if needed they will be able to supply the additional volumes, as spare capacity is still available. These statements have been made on a regular basis the last months, especially after Trump revoked the JCPOA deal with Iran, which will significantly reduce Iranian oil exports the coming months. Analysts are keeping a close eye on the situation, as a severe tightening in the market could become a major problem after November this year, when U.S. sanctions will be fully implemented on Iran and all of its customers.
Oil traders still seem not to have reached a consensus on the future situation. Optimism in Europe is bluntly contrasted by statements made by traders such as Mercuria and Trafigura, who have warned already that oil prices could spike to around $100 per barrel. $100 oil is not even a real doomsday scenario, as global outages and possible conflicts could easily push prices up further. Related: Iran Terror Attack Boosts Oil Prices More Than OPEC Meeting
Not all signals, however, are bullish for oil. The escalating trade war between the U.S. and China, which could lead to a lower demand growth the coming months, could soften the pain and result in stabilizing oil prices due to lower demand growth. At the same time, several emerging markets seem to be heading towards a possible economic crisis scenario. Turkey, Egypt and others, are facing headwinds, while higher oil prices in combination with higher dollar exchange rates in markets such as India also are putting pressure on demand.
The Algiers meeting however has shown that the oil cartel is heading towards a potential existential crisis. The already well documented crisis between leading OPEC members Saudi Arabia-UAE and Iran is escalating. The fact that Iran was not even attending the meeting showed that Tehran is not amused at all about the ongoing efforts of Saudi Arabia and Russia to fill in the gaps in supply expected the coming months. Tehran has repeatedly warned both not to take advantage of the dire situation that Iran is facing the coming months. Moscow and Riyadh were quick to say that any supply crunch will be met by others accordingly.
Other OPEC leaders have also stepped up their efforts to further formalize the ongoing cooperation with non-OPEC countries, especially Russia, for the future. Even that no real legal document has been produced yet to formalize a NOPEC approach, most market analysts are expecting that at or even before the next OPEC meeting in Vienna discussions will be held to put a new framework in place. If this is being put on the table, OPEC’s current position will be changed. Iran, and possibly other hard-liners such as Venezuela, will not be amused as the new oil cartel will be seen as a direct attack on the position of these OPEC members. In a possible new strategic alliance or even formal oil cartel (NOPEC), the power of Iran and others will be under pressure. A possible real split within OPEC is a real possibility, as Tehran will never be willing to become a minor partner in a new NOPEC organization. Moscow and Riyadh, supported by the UAE and others, however seem not to be willing to take notice of any Iranian concerns at present. Geopolitical considerations, supported by a possible revenue windfall due to higher oil prices, are leading Putin and Mohammed Bin Salman’s efforts to squeeze Iran to the fullest. Trump’s tweets and Tehran’s threats are currently brushed aside.
For oil consumers, the coming months will be a rollercoaster ride not seen since the start of the financial crisis. A possible price hike, combined with economic uncertainty worldwide, will increase price volatility severely.
The potential risk of an oil price bump is high, but oil producers currently are smelling blood. Continuing economic growth, even slightly tempered by the U.S.-China trade war and instability in emerging markets, is still strong enough to push demand above 100 million bpd in 2018. Further global demand growth is expected, while supply growth is starting to slow down. Related: What Will Trigger The Next Oil Price Crash?
OPEC’s stated spare production capacity has not materialized at all yet as a factor in the market. Saudi Arabia’s presumed spare capacity is under severe pressure, as the Kingdom still needs to show to be able to sustainably produce 12.5 million bpd. Recently, producers such as Iraq, Libya and Russia, have published very positive preliminary production volumes, but no real volumes have been reported on the market. Historically, optimistic production figures emerge always around OPEC meetings, but facts have most of the time shown a different reality. OPEC at the same time reported that US$11 trillion in new investments are needed until 2040 to keep production levels up. The last years, investments in upstream and downstream have been lagging behind, and there are no clear signals that this will change anytime soon. Some relief can be expected from U.S. shale, at least according to OPEC and the U.S. This, however, will only be the case if investors show an appetite for upstream projects. The current reality is different, fear about a carbon bubble and the anti-hydrocarbon lobby already support a negative spiral of investor confidence.
OPEC and Russia will NOT be able to meet all new demand in the coming years, and international oil companies and independents will have to fill the gap. If they fail to do so, US$100 oil could become a reality faster than many governments and consumers expected.
By Cyril Widdershoven for Oilprice.com
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