OPEC must make deeper cut to oil inventories
LONDON: Saudi Arabia and other OPEC countries should resist any temptation to ramp up production in the wake of a partial recovery in the oil price and instead support deeper cuts to inventories to avoid another “massive” build up of stocks, an influential UK think-tank said on Wednesday ahead of a crunch meeting of producers in Vienna today.
In a report entitled “OPEC’s hard choices,” the UK’s Oxford Institute of Energy Studies (OIES) said OPEC “should continue to pursue their current strategy of reducing the level of inventories. The job is not yet done. The faster this objective is achieved (which requires deeper cuts), the better position OPEC will be in.”
OIES research fellow James Henderson told Arab News there was a strong argument for Saudi Arabia to test the price on the high side as there was “wide uncertainty” regarding a US shale response in the $60–$70 per barrel price range.
Oil is currently trading at about $63 after plumbing a low of $30 when the price collapsed in 2014 after topping $100.
The report’s author, Bassam Fattouh, said price fluctuations, even within the new lower price range, would create uncertainty and deter investment and, consequently, would dampen the risk of over-production.
Fattouh said: “Of course, this is not to suggest that OPEC should seek to induce price volatility — this would be politically very difficult as consumers, producers, and the industry all prefer price stability,” he said.
But he added that the responsiveness of US shale to price movements, together with its short investment cycle, would induce enough volatility to discourage over-investment in the long-term and during low-cost cycles.
OPEC should not aim to dampen this volatility, but instead should focus on managing inventory levels to prevent another build up in stocks, said Fattouh.
He added: “The key question of course is whether the economies of OPEC members can adapt to more variability in their revenues, even if this volatility is within the narrower range. There is a current perception in the market that Saudi Arabia ‘needs’ higher oil prices.”
Fattouh argued that at critical junctures such as these, “OPEC and its most important player, Saudi Arabia, were facing some very hard choices”. While OPEC had reasserted some control of the market in the last few months, the room for manoeuvring was getting tighter and tighter, he said.
“The context in which OPEC operates had been transformed because of shale, so a key question that OPEC had to continuously grapple with is whether there was a ‘sweet’ oil price range that does not endanger the prospects of global oil demand while at the same time keeps a lid on oil supply growth, so the market remains in balance.”
That is no easy task, he admitted.
Traders expect tomorrow’s oil producers’ meeting in Vienna to agree to an extension of the cuts beyond the agreed date of March 2018. But there is an element of uncertainty as some Russian producers view the current price as high enough to justify an increase in output by allowing the cuts agreement to lapse in the spring.
Yesterday, citing OPEC sources, Reuters said Russia and OPEC were heading toward prolonging their oil supply curbs (1.8 million barrels per day) for the whole of 2018 but with an option to review the deal in June, after Moscow expressed concerns the market could overheat.
“It will not be an easy meeting and we always look at various scenarios,” UAE Energy Minister Suhail bin Mohammed Al-Mazroui told Reuters on Tuesday in Dubai. Upon arrival in Vienna, he said cutting output through the whole of 2018 was still the main scenario, but not the only one.