LONDON: OPEC and its allies face a dilemma when they meet in Vienna, Austria on Dec. 6 to decide on a strategy that could shape the oil market in 2019.
They are under pressure to slash production after a price collapse that has sparked memories of the rout in 2014/16.
But how tightly should they turn off the taps? Too much and the price
may rise too sharply, further incentivising shale production in the US.
Too little, and the price could fall further making it more difficult for Gulf economies to balance their budgets.
The oil price has fallen 30 percent to around $60 per barrel since early
October. Fears of a supply crunch have subsided since President Trump
disclosed that countries such as China could continue to import Iranian
oil for at least six months – despite the re-imposition of US sanctions
Combined with slowing global economic growth and a surge in US shale
production, the Iranian waivers convinced the market that supply would
exceed demand and the price has plummeted.
It was only around six months ago that Saudi Arabia and others boosted
supplies to allay market fears that the hobbling of Iranian exports and
strong global growth would lead – inexorably- to a supply crunch.
Now, there is talk once again of a supply glut and the old story line that the price will be “lower for longer” has resurfaced.
As a consequence, OPEC and its allies known as OPEC + with KSA and
Russia being the leading players – are considering cutting production to
support prices when they meet in Austria.
But a complicating factor for OPEC and Riyadh, in particular, is that
President Trump has called on the Kingdom to keep prices low for the
benefit of his working-class voter base in the US.
OPEC, it appears, must perform a geopolitical trapeze act, as well as an
economic one, linked to guesstimates about future supply and demand
There are different views about what the final communique from Vienna will say.
Speaking to Arab News, Riccardo Fabiani geopolitical analyst at
London-based consultancy Energy Aspects said: “There is definitely
pressure from the White House on Saudi Arabia to roll back promises of
cutting production…or to soften production cuts. The trouble is KSA
can’t go back to their allies and say actually ‘we are now not cutting
Fabiani said the pressure to avoid a price crash “is stronger than the
pressure coming from the White House, so eventually there will be a
production cut because it is what KSA, OPEC and Russia need and want”.
The extent of the cut is “the political game” that will be played from here on in, he added.
This weekend’s G20 meeting in Buenos Aries could afford the world’s most
powerful oil players an opportunity to come to a loose agreement,
setting the stage for Vienna. After all, those three nations
collectively speak for a third of global oil production. But whether a
broad consensus can be found is questionable.
At an oil ministers summit in Nigeria on Wednesday Saudi Arabia Energy
minister Khalid Al-Falih said the Kingdom would not cut oil output on
its own to stabilize the market, and Nigeria and Russia said it was too
early to signal whether they would join any production curbs, according
to a Reuters report.
Shakil Begg global head of oil research at Thomson Reuters told Arab
News that Opec would “probably make a gesture, they might change quotas
around, or something like that”, but he thought the market could
rebalance without any adjustment as demand would strengthen in the
winter months and there are currently problems linked to “physical
supplies actually reaching the market”.
Countries such as Venezuela, Iraq and Angola were supplying less than
earlier projections, he said. “We monitor vessel tracking, crude oil
exports, and they fell in October to probably the second lowest level
this year to around 24/25 million OPEC barrels a day,” said Begg.
But he agreed that some form of co-ordinated action from within the broad OPEC group was on the cards.
“The issue is whether they can make a symbolic gesture to reduce output.
But they must also scrutinize how much oil is reaching markets via
export,” said Begg.
Adrian Del Maestro oil and gas strategy director a PwC Stategy&
[subs: correct title] told Arab News: “Most analysts think that a supply
cut is inevitable, but who takes that hit is another conversation.
He added: “KSA will want to deliver cut in a way that has the minimum amount of geopolitical fallout.”
The oil picture, he said, is different than in 2014 — 2016 when several
US oil producers became financially distressed when the oil price
Del Maestro said: “Innovation and efficiencies have lowered break-even
prices dramatically. That means the US tight oil sector can today
survive at a lower price point — in the $40s to $50s price range. In
2014-16 they needed about $70.”
He said Saudi Arabia needs between $70 and $80 to balance its national
budget, although other analysts have suggested the Kingdom would prefer
Giovanni Staunovo, an analyst at UBS said in a note to clients: “The
size of any potential cut will depend on how much oil demand growth
slows down, how much Iranian supply falls due to US sanctions, and how
fast US supply rises.”
Writing in the Financial Times, Christyan Malek, JPMorgan’s head of oil
and gas research in London said the latest oil rout would serve as a
stark reminder for Gulf countries to stay the course on fiscal
consolidation or risk economic failure in a volatile oil market. “If
they succeed, a positive corollary is that OPEC countries will invest
the excess cash windfall into incremental oil capacity and long-term
economic diversification away from oil.” said Malek.
Geezgo for free. Use Geezgo's end-to-end encrypted Chat with your
Closenets (friends, relatives, colleague etc) in personalized ways.>>