Oil car­tel OPEC: Can it ride out the storm?

Muscat Daily - - BUSINESS -

Is­tan­bul, Turkey - For car­tel OPEC - cre­ated in 1960 with the aim of sup­port­ing a sus­tain­able price on the oil mar­ket - it is in some ways a per­fect storm.

Stocks have surged thanks to the rapid emer­gence of oil from US shale de­posits. And due to the abun­dant sup­ply, the price of oil now stands at cur­rently less than US$50 per bar­rel, around a third of the level of ten years ago, when it topped a high of US$147.

This has been ter­ri­ble news for the lead­ing mem­bers of the group - in­clud­ing Iran, Saudi Ara­bia and Venezuela - who have seen holes blown in their hy­dro­car­bon-de­pen­dent bud­gets.

Mean­while, on a longer term hori­zon, the fo­cus has switched from when ‘ peak oil’ will be reached - the mo­ment oil ex- trac­tion starts to de­cline due to dwin­dling re­sources - to when de­mand it­self could fall.

So the mood as top en­ergy bosses and min­is­ters met at the World Petroleum Congress in Is­tan­bul last week ranged from pen­sive to som­bre.

“It’s hard to come to terms with the fact that this is a dif­fer­ent oil in­dus­try,” said Daniel Yer­gin, the vice chair­man of IHS Markit, who wrote the ac­claimed book The Prize on the his­tory of the global oil in­dus­try.

“The US will later this year or early next year reach the high­est pro­duc­tion in its his­tory,” he told the congress.

OPEC has no con­trol over the revo­lu­tion caused by the pro­duc­tion of shale oil in the United States, which is not a mem­ber of the car­tel.

In a bid to push prices up, OPEC and key non-car­tel mem­bers - in­clud­ing Rus­sia, but not the United States - agreed co­or­di­nated out­put cuts in De­cem­ber to push up prices.

The cuts were en­vis­aged for six months and ex­tended for an­other three. But so far, they have had hardly any ef­fect - with oil prices still hover­ing at US$45 a bar­rel.

The oil in­dus­try was con­fronted by mar­ket forces ‘which are strong, stub­born and as a re­sult we are here to­day with prices that are stuck... where they were six months ago’, said In­ter­na­tional En­ergy Agency (IEA) direc­tor Fatih Birol.

“It will be a very, very dif­fi­cult six months for the oil in­dus­try, a case of rid­ing out the storm,” he said.

OPEC sec­re­tary gen­eral Mo- hammed Barkindo ad­mit­ted there had been ‘high ex­pec­ta­tions’ that mar­kets would re­spond to the deal in 2017, but so far these had not been re­alised.

The fail­ure of the deal to make a dif­fer­ence is par­tic­u­larly irk­some for OPEC as com­pli­ance - the im­ple­men­ta­tion of the pledges - has been over 100 per cent.

Un­de­terred, OPEC and the non-car­tel mem­bers party to the deal will have a com­mit­tee meet­ing in Saint Peters­burg on July 24 to re­view its ef­fects.

Mean­while, an ef­fort to tighten co­or­di­na­tion, Barkindo re­vealed that OPEC had held ‘very use­ful pre­lim­i­nary meet­ings’ with US shale pro­duc­ers.

OPEC’s own in­flu­ence has also slipped in re­cent years and it now counts for just a third of global oil sup­plies com­pared with 40 per cent a decade ago.

As well as the US shale revo­lu­tion, the greater im­por­tance of ad­di­tional non-OPEC mar­ket play­ers - in­clud­ing Brazil and Mex­ico - is also be­ing felt, ac­cord­ing to Sarah Emer­son, head of the US-based En­ergy Se­cu­rity Anal­y­sis.

Mean­while, rapid global changes could also hit de­mand for oil in the long term, es­pe­cially with the ex­pected growth in elec­tric cars.

“At what point de­mand stops grow­ing is very much linked to the au­to­mo­bile,” said Yer­gin.

“We are see­ing now a con­ver­gence of a whole lot of tech­nol­ogy which will change the na­ture of what ve­hi­cles are,” he said, point­ing also to the growth in ride-hail­ing apps.

But par­tic­i­pants in the congress em­pha­sised that the growth in elec­tric cars was start­ing from a very low base and petrol would likely still be needed in trucks and planes for years to come.

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