OPEC, 10 non-OPEC countries sign deal to ensure oil stability

KUWAIT: OPEC and 10 non-OPEC countries, spearheaded by Russia, have signed a long-term agreement aimed at promoting cooperation and ensures stability of oil markets, a Kuwaiti official said yesterday. This agreement, signed at recent OPEC+ meeting in Vienna, guarantees “sustainability of cooperation between OPEC and non-OPEC in areas beyond maintenance of international oil markets’ stability,” Haitham Al-Ghais, Kuwait’s Governor at OPEC, said. He was speaking during an interview following his return from Vienna where he took part in a meeting between OPEC and non-OPEC, known as OPEC+, which approved further production cuts of 500,000 barrels per day (bpd) until March. The new cuts, added to the already 1.2 million bpd reduction, will start next month. “The door is open for other oil producers to join the new agreement,” he said.

Ghais underlined importance of abiding by the production cuts, which aimed at countering glut in supply. A member of the executive committee that monitors implementation of cuts, Ghais said, “you can’t see only three or four countries take the burden upon themselves and cut production, but it is a collective responsibility by the 24 countries.” Kuwait, Saudi Arabia and the United Arab Emirates (UAE) led an action at the OPEC+, which met on December 6, to encourage producers reduce further amounts of oil. Projections for 2020 show that oil supply would increase by 2.2 million bpd against a demand of 1.1 million bpd, with half of the supply coming from shale oil, said Ghais, who cited big non-OPEC+ producers like Canada, Norway and Brazil. “Had OPEC+ failed to agree on further cuts, there would have been additional 63 million barrels in the first quarter,” he said.

He said projections showed a rise of 600,000700,000 bpd in stocks during the first quarter 2020, which came from outside OPEC+. “If we start the year with huge stocks the second quarter will be tough,” added Ghais. The new cuts, he went on, aimed at maintaining stability of oil markets and this decision would be reviewed in the March 5-6 meetings, “which will examine economic developments like the US-China trade dispute and Brexit.” The new cuts, said Ghais, took into consideration that global economic growth be up to three percent in addition to international trade. “Honestly OPEC and its allies don’t seek a specific price, but we want to see international oil stocks at comfortable levels, which means the average of the past five years,” he said.

“The price is set by the seller and buyer not the countries. There are oil markets in London and New York where prices are being set on a daily basis. OPEC does not eye a specific price and this a very important point to make,” Ghais asserted. Bank of America has recently anticipated a solid commitment by OPEC+ that could raise prices to $70 bpd before end of first quarter 2020. OPEC+ countries produce around 45 million bpd, or almost half of global output, but Ghais said economic and political developments were out of control of OPEC+. According to Ghais, OPEC+ sought a balance between supply and demand in order to prevent a markets’ collapse similar to the one in 2014, which not only affected producers but the oil industry as a whole.

Medium-term challenge

Ghais, meanwhile, said shale oil posed a medium-term challenge to OPEC, despite its slow development. Ghais expected that if we wanted to stay in this competition as OPEC oil producers, despite the boom in shale production technologies, and increasing the ability of shale oil producers, they must adapt to a low price environment, “but when compared to GCC oil countries, for example, the difference is still large.” Indeed, he expects demand for OPEC oil to rise during the next 3-5 years, to reach in the year 2040 to 39 million barrel, compared to the current 29.5 million barrel, i.e. an increase of about 10 million barrels per day. He said that this will be at the expense of other producers, adding, “the demand for OPEC oil is the one that will remain and grow in the future, and this will coincide with a decline in shale oil production. This has begun to be shown by a decline in the pace of growth recently.”

“In fact, shale oil is not only a challenge for OPEC, but also for the oil industry in general, because the production mechanism is not organized and there is no one to control production, Although major companies such as Chevron and Exxon Mobil recently entered this field. I think shale oil will remain a challenge to OPEC oil during the next five years,” he added. Ghais affirms that Russia is a partner to OPEC, not a competitor, saying that “the Russian commitment is currently very good, and Moscow made promises of 100 percent commitment,” noting that excluding condensate from the Russian cut will help them abide by the agreement. He confirmed that there is no basis for what is reported about the end of the era of oil or its peak.

In this context, the British magazine ‘The Economist’ quoted a few days ago the International Energy Agency, which said that by 2040 the energy derived from the sun and wind will increase by about five times to seven percent of the total global energy mix, and added these sources would not substitute for fossil fuels that produce energy without interruption. “This is almost in line with OPEC’s expectations that the proportion of renewable energy will be between seven and 10 percent of the global energy mix by 2040,” Ghais replayed. “We all believe in OPEC and we cannot rely only on oil and gas. The world will grow more and will need all kinds of energy sources,” he added.

Regarding the challenges facing OPEC, he pointed out the “fierce attack on the part of environmental activists,” whom he believes need to increase awareness, especially in the west, that oil is not harmful if used in an environmentally friendly manner. “Therefore, we suggested to the organization’s secretariat that a media campaign should be launched to communicate with environmental activists and make them aware of the role of oil and its importance in global economic growth,” he noted. By early January 2020, the OPEC share after the new cut production plan will reach 372,000 bpd while its allies share will reach 131,000 bpd to reach total of 503,000 bpd, bringing total reduction from 1.2 to 1.7 million barrels per day.

Saudi Arabia is the largest operator of OPEC with the new reduction of 167,000 bpd, followed by the UAE with 60,000, Kuwait with 55,000; Iraq with 50,000 barrels, and from OPEC allies, Russia comes with 70,000 bpd, followed by Mexico with 18,000 barrels per day. Venezuela, Iran and Libya are excluded which either are suffering from sanctions or security and economic turmoil. Gais concluded his statement by saying that oil prices did not wait for the OPEC Plus agreement to enter into force with Brent futures rose by 0.4 percent to reach $64 a barrel, and what remains now is strict adherence to production quotas. — KUNA