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OPEC+ and the threat of glutted global oil

OPEC, Sylva
OPEC

By Sonny Atumah

The Organization of the Petroleum Exporting Countries, OPEC and its non-OPEC allies known as OPEC+ would meet next week at the Vienna, Austria headquarters to review production freeze arrangement in a global oil market that tilts towards a glut.

Oil producers to decide in June on extending cuts(Opens in a new browser tab)

The OPEC and OPEC+ meetings are scheduled for the 5th and 6th December. Limiting output to shore up prices has been the intention of the 14 member oil cartel that has been enlarged to 24 in the alliance that is up against the United States shale producers. The supply build up anticipated for 2020 is a cause for worry to OPEC+ ministers that would gather in Vienna.

OPEC and its Russia-led non-OPEC allies in the production freeze are to reduce inventories and boost prices not minding market share dominance and having OPEC’s share of global oil production brought down below 30 per cent.

OPEC may not be comfortable that U.S. tight crude or shale oil production would continue to grow as new pipelines will allow more Permian crude to flow to the U.S. Gulf Coast export hub. Available statistics shows that this month, the United States had a record oil production of 12.8 million barrels per day, a figure never realized in their petroleum history. In January 2019, the US crude production reached11.4 million barrels per day, bpd thus contributing more than some OPEC nations output severally.

That the United States which was the leading oil buyer consuming over 20 per cent of the world’s 99 million bpd of daily crude oil production now having a production output of 18 per cent in the petroleum market is a phenomenal feat.

This month the U.S. was ahead of Saudi Arabia, which reached 12.4 million barrels per day or 12 per cent of the world’s total output, and Russia with 11.4 million barrels per day or 11 per cent of the global market. The America First Energy Policy of the Donald Trump administration has yielded impressive results that in the month of September, the United States exported more petroleum than it imported; since it became a net petroleum importer in 1949. The Energy Information Administration, EIA records also began that year.

The EIA Short Term Energy Outlook is projecting a production of 13 million bpd by early 2020. The shale technologies including seismic imaging, hydraulic fracturing and horizontal drilling mostly from the Western Texas Permian Basin is a research effort that has allowed the United States to become a net exporter of petroleum.

Would OPEC at next week’s meeting roll over the March 2020 output cut plan to June? The de facto OPEC leader Saudi Arabia, a rollover plan is favoured ostensibly believed to shore up oil prices possibly for its Aramco IPO. On Russia, it is speculative. Russia that leads the non-OPEC is believed to be non-committal as it does not want the price of oil to go beyond a level that would be very profitable for American shale producers that are believed to be very vulnerable.

But analysts paint two scenarios; either rolls over the cuts through June next year when they meet early next week or postpone a decision on the deal for early 2020, before the current cuts expire in March and again, roll over the production cut until June 2020. What is certain is that there is a consensus for a rebalancing of the global oil market.

The Russian leader, Vladimir Putin, on Wednesday, corroborated the Russian position for a common goal to keep the oil market balanced, and that Russia would continue to cooperate with the cartel to keep the market stable. The reality is that most OPEC members are hamstrung by a lack of funds to finance their budget deficits that are overly dependent on crude oil exports. The United States shale has indeed, rampaged up that the OPEC+ is being challenged to a duel. It has also given U.S. President Donald Trump latitude to tighten the sanctions noose on OPEC members Iran and Venezuela.

What appears to be a production war between the OPEC and the United States shale oil may survive in the short term. Some analysts believe the US Shale would top 14 million bpd in 2020 and would continue to increase. But they believe that OPEC has the reserves that are sustainable and would affect the US oil in the long term. It is believed that the US oil supply growth would slow down due to financial difficulties even when they may have the capacity to pump more oil.

Oil price rises further as OPEC intensifies efforts on supply cut(Opens in a new browser tab)

Last Tuesday in Oslo, the head of the International Energy Agency, IEA Fatih Birol in an interview told Reuters that OPEC should make the right decision for the global economy that is still very fragile. Birol believes that the pressure is strong on the OPEC plus Russia, as a result of supply growth coming from the non-OPEC countries–—the U.S., Brazil, Norway, Guyana and others.

He is of the firm belief that oil supply would be plentiful, the result of demand slowing due to weaker economic growth, especially in China. The IEA also believes that non-OPEC countries can add about 2.3 million bpd to crude supply in 2020, while global oil demand growth is expected at 1.2 million bpd. OPEC+ may keep its current production cut deal intact and also face a worsening glut.

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