For OPEC, walking a tightrope versus toeing the line
When OPEC+ convenes this week, it will take up the task of evaluating the state of the global oil balance. The group is being buffeted by concerns about the recovery in global oil demand and, at the same time, indications about weather-related production losses in Mexico and the US.
The general observation we would share is that non-OPEC supply losses such as those tied to Hurricane Ida are not used as an excuse to raise output. Thirty to thirty-five years ago, however, this would have been a different story as OPEC at that time exhibited difficulties sitting on its spare production capacity.
The group saw its output contract from about 31 million barrels per day in 1981 to 16 million barrels per day in 1986 (the first year we attended OPEC meetings). Having 15 million barrels per day of spare output capacity brought about enormous challenges, particularly given global oil demand was only 61 million barrels per day at the time. Then, and for several years afterward, the oil market faced oversupply risks partly because “cheating on quotas” evolved into something of an artform among some organization members.
In terms of context, the issue of OPEC output discipline has not been a concern for us for the past 15 years or so. Most of OPEC’s spare production capacity has been eliminated. Part of that relates to sociopolitical unrest and resource mismanagement (Venezuela is an example). Growth in global oil demand has generally surprised on the upside these past two decades, and non-OPEC supply has generally lagged behind the growth in global consumption. Our finding is contrary to what most market watchers believe owing to the fixation on US shale oil output which, by the way, is now in its twilight phase.
Nevertheless, the elimination of quota cheating and a notable reduction in spare output capacity means the general risk for the oil market has become one of potential over-tightening or, put another way, the polar opposite of the situations we lived through during the 1980s and 90s.
At the present time, the casual press is chock full of stories about demand weakness, but an assessment of close-to-real-time data indicates global oil demand is actually tracking our forecast.
Though we will not generate August’s monthly demand estimate for our clients for a few more weeks, the inventory data we can assess does not signal global demand weakening. Previous work for July showed global oil demand to have run modestly stronger than our forecast.
OPEC remains focused on working down global oil inventories further. Though stocks have already been reduced by about 360 million barrels since July 2020 — the largest draw on record — the sense we get is that inventories are not yet down at the desired level. Because OPEC (led by Saudi Arabia) does not want to “push” crude into the market (instead wanting any extra supply to be “pulled” in from demand pressures), the OPEC+ countries will be relying on their respective operating company indications about near-future demand pressures.
Most exporters have at least a two-month forward view from refiners scheduling tanker loadings. With the fourth wave of the coronavirus disease pandemic still a concern, it is entirely possible that OPEC+ takes up a discussion about delaying its planned quota unwind if the group believes it will result in inventory builds. The fact that this is a likely discussion is critical in that it signals (again) the group’s intent to elevate oil income levels by managing inventories though production control.
Michael Rothman is the president & founder of Cornerstone Analytics,
a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering
the global energy markets and has been attending OPEC
meetings since 1986.