Long road ahead to reach bal­ance in oil mar­kets

The National - News - Business - - Front page - Robin Mills Robin Mills is CEO of Qa­mar En­ergy, and au­thor of The Myth of the Oil Cri­sis

Opec did too good a job manag­ing ex­pec­ta­tions ahead of its lat­est meet­ing in Vi­enna, which con­cluded on Thurs­day. The ex­ten­sion of the deal by nine months, rather than six, was so clearly flagged that oil prices fell 5 per cent on its an­nounce­ment. Some vague ru­mours had emerged be­fore­hand, that a longer ex­ten­sion was on the ta­ble, that Nige­ria might be roped in, or that cuts might be deeper. The mar­ket’s re­ac­tion prob­a­bly re­flects the liq­ui­da­tion of spec­u­la­tive long po­si­tions, held to cover against an Opec sur­prise.

In­stead of a re­peat of the ini­tial six-month term, the nine-month pe­riod, tak­ing us to the end of next March, is ideal. It al­lows for spread­ing ad­her­ents’ com­pli­ance over a longer pe­riod.

Saudi Ara­bia has been bear­ing a dis­pro­por­tion­ate share of the bur­den. Its do­mes­tic con­sump­tion goes up sharply in sum­mer be­cause of oil burn­ing to power air con­di­tion­ing. Crude oil burn last year was down some­what ow­ing to in­creased gas sup­plies and the im­pact of higher elec­tric­ity and wa­ter prices. But the gas boost will not be re­peated this year. A ninemonth ar­range­ment would av­er­age out the coun­try’s higher sum­mer and lower win­ter out­put.

Some­what sim­i­larly, Rus­sian pro­duc­tion usu­ally per­forms strongly in the sec­ond half of the year as weather con­di­tions al­low eas­ier drilling. Com­pli­ance to its 300,000 bar­rels per day com­mit­ted cuts has been very par­tial; but in­clud­ing the com­ing win­ter pe­riod will bal­ance out growth over the sum­mer.

Iran’s pres­i­den­tial elec­tion is pos­i­tive for fu­ture in­vest­ment, but it has reached a pro­duc­tion plateau for now, and in­ter­na­tional oil com­pa­nies will take three or four years to bring on new fields even if they con­clude contracts now. So Tehran has lost lit­tle from con­tin­u­ing with a cap that is just above the coun­try’s cur­rent out­put.

There was never much prospect that other pro­duc­ers would be brought into the deal, de­spite the vague chat­ter over Nige­ria, where pro­duc­tion cuts from in­se­cu­rity have eased. Libya like­wise re­mains too volatile to com­mit to any pro­duc­tion level.

Equa­to­rial Guinea has now for­mally joined the pro­duc­ers’ or­gan­i­sa­tion, but its 12,000 bpd cut hardly amounts to a sin­gle well in Saudi Ara­bia. Turk­menistan, pro­duc­ing some 260,000 bpd, might be leaned on by Rus­sia to turn up next time. Egypt, also men­tioned as a pos­si­ble at­tendee, could hardly cut since it is a net im­porter with out­put in steep de­cline, but like other non-Opec play­ers, it could vol­un­teer its nat­u­ral de­cline as a “cut”.

Opec can­not blame the limited im­pact of cur­rent cuts on poor com­pli­ance – mem­bers’ ad­her­ence to the deal has been well above his­toric norms, even if Saudi Ara­bia and a few other mem­bers have over-com­plied to bal­ance out oth­ers, such as Iraq. The con­sis­tent co­op­er­a­tion with non-Opec play­ers – even if only Rus­sia and Oman have re­ally cut be­low where out­put would be any­way – is en­tirely new.

So it is dif­fi­cult to see what the next big mar­ket-mov­ing Opec ploy could be. Com­pli­ance will prob­a­bly grad­u­ally erode this year, but the Saudis, hav­ing set their course, will have to tol­er­ate some cheat­ing. No mem­ber ap­pears set for big, sud­den out­put gains, although Iraqi ca­pac­ity will keep grow­ing. Con­versely, across Opec and non-Opec, there is lit­tle room for deeper de­lib­er­ate cuts, although po­lit­i­cal un­rest might dis­rupt Venezue­lan ex­ports. Even if stocks are draw­ing down heav­ily by next March, the or­gan­i­sa­tion has not laid out an exit strat­egy – how it will grad­u­ally boost out­put to avoid a price spike or crash.

The planned cuts were sim­ply never very big by his­toric stan­dards. A planned 1.7 mil­lion bpd of cuts, about 1.2 mil­lion bpd in prac­tice, are un­der­mined by a pro­jected gain in US pro­duc­tion of about 1.4 mil­lion bpd since the deal in Oc­to­ber. As over­stuffed in­ven­to­ries di­min­ish only slowly, Opec is trapped in a long war of at­tri­tion.

A planned 1.7 mil­lion bpd of cuts, about 1.2 mil­lion bpd in prac­tice, are un­der­mined by a pro­jected gain in US pro­duc­tion of about 1.4 mil­lion bpd since the deal in Oc­to­ber

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