OPEC+ responds to impact of trade wars

The decision to maintain oil production cuts, and by so doing the market price, is a clear reflection of the impact of the US-China trade wars. Jonathan Bell assesses the new alliances.

Whenever there is an OPEC (Organsation of Petroleum Exporting Countries) meeting taking place in Vienna it is inevitably a massive magnet for the world’s press. And unsurprisingly it can get ugly as journalists and analysts wrestle to get in front of various oil ministers and other spokespeople from the various delegations. Thankfully I wasn’t there this week, but one of the worst things about being part of this jamboree is continually trying to avoid getting wacked round the head by camera crew who are all but oblivious to where they are dashing to get their next footage and soundbites. 

Years ago, I used to visit OPEC meetings in Vienna to be part of this mad scrum, not so much in my journalist role but more so for analytical work related to crude oil pricing. I can’t tell you much more about that as somebody might want to kill me!

But in recent years the oil sector has changed massively and so have OPEC meetings, although the mainstream press scrum still feel they need to behave as they have always done. And when I say changed I mean there is now little actually decided at the Vienna meetings – the real horse-trading is done beforehand. Why?  Because there is far too much at stake for the oil producers who are being impacted by the US-China trade wars. In addition, the US-OPEC equation all changed with the push for the development of US shale oil and the politics surrounding that. 

Consequently, OPEC is no longer what it was. The OPEC meeting earlier this week was largely a formality where the organisation announced that it was going to cut crude oil output by 1.2 million barrels per day (mbpd), or 1.2% of global demand, until March 2020. But, and a big but, the decision to do this was actually taken at the G20 meeting in Japan when Saudi Arabia – the OPEC swing producer – met with Russia and agreed to maintain oil production cuts to try to ensure a stable crude oil price.

OPEC is now largely referred to as OPEC+, and this dates back to late 2016 when the so-called OPEC+ alliance of 25 producers agreed to cut production in order to put a floor under low oil prices that had resulted from a glut of supply, particularly due to increased US shale oil production. The US – which is now the largest oil producer in the world is, of course, not a member of the OPEC+.

Saudi Arabia is currently producing 9.7 mbpd and has 2.3 mbpd of spare capacity. According to recent US data, the US. has been producing 12.1 mbpd, which is about 1.3 mbpd more than last year.

But the agreement reached at the G20 between Saudi Araba and Russia has angered some OPEC members – particularly Iran – which sees an erosion of policy decisions being taken by the group collectively. It is not that Iran is against the cuts – it needs these more than ever given the US’s desire to try and push for lower oil prices and the fact that Iran has been impacted massively by the US economic war against it.

Politics has always played a major part in the global oil demand/supply equation. And, as we all know, crude oil supply is also something which has been used in the past as a political bargaining tool. This in turn partly led to the development of shale oil deposits in the US, and technological developments have seen that industry thrive alongside the further downstream activity of shale gas. 

The US wants to see low crude prices and has consistently put pressure on its ally Saudi Arabia to increase oil production in order to drive the price of crude down. Keeping low gasoline prices at the pump is a vote winner for any US president, and with a presidential election coming up next year, this issue is something which is very much in President Trump’s focus.

The shale oil versus conventional crude oil battle has largely given the US what it wants in this regard. At the same time, as we all know, this has pitted the US against OPEC and other oil producing countries that want to see a high crude oil price. Just how this marries up with the ‘special’ relationship between the US and its main OPEC ally Saudi Arabia is, at times, hard to work out. 

Saudi Arabia has to maintain what it sees as a ‘reasonable’ oil price because of its considerable budgetary commitments. Analysts assess that what Saudi would actually like to be getting is $85 per barrel to truly meet its requirements. It is a lot easier for Russia of course.

The US administration must be jawing on a lot of tobacco over the alliance which continues between Russia and Saudi – and the oil price looks relatively stable around the $60 per barrel mark allowing Iran decent returns on the smaller amount of oil that it is still able to sell. On Tuesday, Brent crude futures were trading at $65 per barrel and West Texas Intermediate at $59.

However, within OPEC – where oil production and exports have already been impacted by the sanctions against Iran and the inability of Venezuela to produce, there are concerns that the agreement to continue production cuts of 1.2 mbpd is simply not enough. Member countries have noted that global oil demand growth for this year has fallen to 1.14 mbpd whilst non-OPEC supply is expected to grow by 2.14 mbpd. 

Speaking on Monday about the global demand for oil and the market prospects, in a response to current US shale oil production, Saudi Energy Minister Khalid al-Falih said, that from time to time, OPEC and non-OPEC countries needed to trim production to prevent extreme volatility,

Al-Falih also stated “I have no doubt in my mind that US shale will peak and decline like every other [oil] basin in history. The question is when.” Until it does, he added, it would be “prudent for us that have a lot at stake and also for those of us who want to protect the global economy” to make adjustments.

A decisive factor in the crude oil price outlook for the rest of the year will be the success or failure of the trade talks between the US and China. Analysts and OPEC+ producers are in no doubt that whatever is done to trim oil production is only part of the answer to improving stability and improving market demand. 

The US-China trade wars have hit global oil demand and that is now hurting many companies and economies. There is a general lack of confidence in the global market because of this. Many companies have stopped placing orders and/or investing. Much will depend on whether the US and China can carry through the current trade truce which was tentatively agreed to last weekend to a positive trade agreement. It is in everyone’s interest.

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