By Sonny Atumah
The Organization of the Petroleum Exporting Countries, OPEC at its biannual conference at its headquarters in Vienna, Austria, on Friday, June22, 2018 analyzed oil market developments since the November 2017 meeting and reviewed the oil market outlook for the remainder of 2018. The inventory overhang had fallen close to the target to reduce inventory and increase prices, so it agreed to increase crude oil output to stabilize the markets. The stance appeared to be against the deal of November 30, 2016 of the OPEC and non-OPEC producers led by Russia to curb high global oil stocks by about 1.8 million barrels per day, bpd until the end of 2018.
From both angles or reducing and increasing crude supplies the OPEC aim is to balance the markets. But would the market ever balance? With OPEC’s appeal to member countries to reverse to supply levels jettisoned 18 months ago it was obvious the crude market had counterbalanced. Ordinarily the situation of low crude inventory with high prices was good for the oil cartel but it portended danger for member countries as major consumers like the United States, China and India favoured a reversal of the OPEC resolve for a supply freeze. They all raised concerns that oil producers should increase supply to prevent global oil crisis.
It has been a problem for OPEC standing between the devil and the deep blue sea. The oil market tends to be returning renewed cyclicality in its posturing. OPEC unfortunately hardly controls production and competition with a contribution of about one third to global crude oil market. The OPEC as a producer’s cartel hardly determines the market which is a buyers’ market. These intervening variables and geopolitical considerations that OPEC may refer to as uncertainties are the bane of members which economies are woven around crude oil for fiscal revenues.
OPEC member countries recently came under intense pressure from the United States President, Donald Trump on soaring cost of crude. After OPEC statement last week Trump twittered: “Hope OPEC will increase output substantially. Need to keep prices down!” Analysts blamed the sanctions slapped down on Venezuela and Iran by the United States as contributory factors. The decline in global oil inventories and worries about the impact on oil supplies after the U.S. decision to withdraw from the international nuclear deal with Iran, as well as Venezuela’s collapsing oil output has caused anxieties in the crude market. The falling Venezuelan output due to an economic crisis has helped OPEC deliver a bigger cut than intended under its pact with Russia and other producers to curb supplies and remove a global glut.
OPEC dispelled claims that the United States influenced the recent policy reversal but it was obvious who was stoking the fire. Gulf Cooperation Council, GCC OPEC members led by Saudi Arabia, a key ally of the United States spearheaded campaigns to boost oil supplies after crude rose above US$80 a barrel. Saudi Arabia’s Oil Minister Khalid al-Falih had warned that the world could face a supply deficit of up to 1.8 million bpd in the last quarter of 2018. Falih said: “We’re not going to allow a shortage to materialize to the point that markets will be squeezed and consumers will be hurt.” Analysts believe that the oil cartel conference communiqué without details of specific allocations meant there was no consensus on the level of supply increases for members. The 18-month output freeze that reached 152 percent conformity level by May 2018 required few countries like Saudi Arabia with excess capacities to meet the target of supply increases.
Again, Russia agreed for output cut extension by OPEC and non-OPEC allies six months ago on the condition that OPEC should oversupply the market, lower price in the 40s and 50s a barrel to send a strong signal to American shale producers that they are not going to have a free ride. The surge in shale production it was projected may push oil back down to between US$50 and US$65 a barrel. Analysts believe that a spike in price for crude beyond US$65 a barrel might spell doom for major producers that own most of the oil still in the ground. They contend that a sustained high price of crude would attract more investors in electric vehicles and renewable energy.
In essence it would speed up electric passenger vehicles production leading to early oil demand peak by 2034 for internal combustion engine, ICE vehicles. DNV GL in its Energy Transition Outlook forecasts that crude oil supply would plateau between 2020 and 2028 and by 2034; natural gas will overtake oil as the main source of energy. By 2050 natural gas would be the single largest global energy source, satisfying 27 percent of demand. The Saudi Energy Minister might have met his counterparts from Russia and the United Arab Emirates, which holds the OPEC presidency, and discussed the deal that was sealed last weekend to increase crude supply in the meeting of the 24-member OPEC and non-OPEC allies.