Last year ended on a sour note for members of OPEC and their non-OPEC allies with the price of global benchmark Brent crude oil futures falling below $50 per barrel for the first time since mid-2017. Production figures for December show that the 11 OPEC members party to the deal took action even before the agreement came into effect, slashing supply by 850,000 b/d, with Saudi Arabia accounting for 65 percent of the total. Roughly 800,000 b/d more will have to be drained from the market if OPEC is to attain the new target of 25.9 mb/d.
The price of benchmark Brent crude oil, which had risen by $10/b since the start of 2019, fell back after trade data this week from China suggested weaker economic activity by the Asian economic giant. Although Iran and Libya are not party to the Vienna agreement, uncertainty over the impact of U.S. sanctions on Iranian oil exports beyond May, when waivers granted to eight countries expire, and a lack of clarity on Libyan production, where oil field shutdowns due to internal strife have hit overall output, are other factors that have contributed to volatility.
Saudi energy minister Khalid al Falih said he was concerned about this price volatility, referring to the swing from a high above $86/bbl in October 2017 to below $50/bbl at the end of December 2018 for benchmark Brent blend crude oil. Producers, he said, should do more to narrow the gap.
But Falih also said the oil market was on track and would quickly return to balance thanks to the commitment by producers party to the Vienna agreement to remove 1.2 mb/d from the market for six months starting in January. “Demand growth remains healthy with forecasts in the 1.3 to 1.5 million barrels per day range, while supply is starting to reflect the impact of our adjustments,” he told an energy industry event in Abu Dhabi on January 13. These adjustments, he added, would eventually be reflected by inventory levels.
Iran’s exports have been curtailed by U.S. sanctions that came into effect in November 2018 and have fallen by more than 1 mb/d from pre-sanctions levels, though they are expected to rise in the first quarter as buyers granted sanctions exemptions resume purchases of Iranian crude. But what happens after the waivers expire in May is still not known.
The U.S. special representative for Iran, speaking also in Abu Dhabi, said the United States was not looking to grant more waivers to importers of Iranian oil. The United States’ stated goal when it imposed tough new sanctions against Iran’s energy, banking, and shipping sectors in November 2018 was zero exports from Iran.
Key to securing the agreement in Vienna was Russia’s role as leader of the non-OPEC bloc and as mediator. Novak pledged a cut of 228,000 b/d, roughly half of the total non-OPEC share, though he has since made clear that this would be a gradual reduction. Novak said on January 11 that Russia would trim production by 50,000-60,000 b/d in January and reach the target over several months.
Falih, in Abu Dhabi, made no secret of his disappointment over the delay by Moscow in implementing the cuts fully but added that he expected Russia to catch up and make a positive contribution to balancing the market. Whether this suggests a slight strain in the newfound alliance between the two energy giants remains to be seen but it is no secret that Russian oil companies are not keen on cutting production given the technical challenges specific to Russian oil fields.
Another major concern for the success of OPEC’s strategy is U.S. oil production growth. The United States is now the largest oil producer in the world ahead of Russia and Saudi Arabia and as such can influence markets even though it remains a modest exporter of crude. The United States’ shale oil and conventional producers, unbridled by any output restraint, are expected to produce an average 12.1 mb/d in 2019, with much of the increase expected in the second half of the year.
February 4, 2019