More output cuts needed for oil spike
Never mind the tweets, the threats and the hallelujah for its demise — Opec and associate producers led by Russia have done it again. Oil producers had in recent months increased production significantly to accommodate the market for the severe sanctions on Iran oil exports, only to find President Trump softening the sanctions, and the oil market became flooded with supplies.
No wonder then oil prices lost more than 30 per cent from nearly $86 a barrel in early October to somewhere around $59 a barrel before the latest Opec meeting. After perhaps some hesitation, the fifth Opec and non-Opec Ministerial meeting decided to adjust overall production by 1.2 million barrels a day (bpd), effective from January for six months.
The market reaction was not so buoyant as expectations were for a bigger cut. Brent, as I write, is only $60.22 a barrel even though there has been an outage of some 0.4 million bpd from Libya. Rystad Energy of Norway said: “The agreed production cuts will not be enough to ensure sustained and immediate recovery in oil prices. The muted market reaction seen thus far comes as no surprise to us.”
However, the agreement may have certainly stopped the rot as some expected prices to head further down if the meeting ended without a cut. Oil prices are not strictly dependent on producers’ actions only.
The looming slowdown in global growth, the uncertainties in the outcome of the trade wars, and their negative impact on oil demand in addition to the still buoyant production from outside Opec have been influencing commodity investors, especially in oil. As usual, investors are also waiting for the actual application of the agreed cuts and the mechanism to ensure compliance.
Analysts are not expecting prices to be more than in the $60-$70 throughout 2019. The US Energy Information Administration (EIA) is forecasting $61 in 2019. The International Institute of Finance (IIF) said: “The agreement would lead to a modest increase in Brent oil prices to the range of $65-$70 per barrel. We at the IIF are still working with an average Brent oil price of $67 per barrel for 2019.”
The average Opec and IEA supply and demand forecast for 2019 is not encouraging either. While demand is forecast to grow by 1.35 million bpd, non-Opec supplies are expected to grow by 2.13 million bpd. Even if the non-Opec cut is taken into consideration for the whole of 2019, supply growth would still be more than for demand.
Prices would continue to be at risk. Opec’s latest monthly report says “In 2019, demand for Opec crude is forecast at 31.4 million bpd, around 1.0 million bpd lower than the estimated 2018 level”, thereby confirming why other analysts believe a bigger cut might be required to stabilise the market.
The next producers’ meeting is in April may dictate an extension of the agreement to the end of 2019 and even increase the cut to maintain market stability and prices at acceptable levels. The promised institutionalisation of the Opec and non-Opec producers’ cooperation should be expedited given the experience since the end of 2016.