Source: Arab News, by Cornelia Meyer
Oil prices marked a two-week losing streak hitting lows below $39.3 per barrel for Brent and $37.1 for West Texas Intermediate (WTI), which is well below the psychologically important $40 mark.
The commodity rebounded slightly over the weekend on positive news of US President Donald Trump’s health, hitting $40.49 for Brent and $38.33 for WTI midday central European time (CET). However, one should not be misguided in thinking that the industry is out of the woods.
OPEC+ (a grouping between OPEC and its 10 non-OPEC allies led by Russia) has done a great job taking supply out of the market. Currently the cuts amount to 7.7 million barrels per day (bpd).
Compliance has been somewhat of an issue with Saudi Arabia and Russia conforming and several countries namely Iraq, Nigeria and, in August, even the UAE, exceeding their quotas.
The laggards are on a schedule to compensate their overproduction through Q4 (fourth quarter of the year). Both Iraq and Nigeria should have already done so within Q3 but failed to live up to their promises.
In August, the UAE was the big surprise pumping a whopping 250,000 bpd above quota. It resulted in Energy Minister Suhail Al-Mazrouei personally flying to Riyadh in mid-September to sit side by side with his Saudi counterpart Prince Abdul Aziz bin Salman during the Joint Ministerial Monitoring Committee (JMMC) of OPEC+. The JMMC is tasked with monitoring compliance with the agreements and Al-Mazrouei’s personal visit to Saudi Arabia was a clear sign that the UAE was on board.
Reuters reported that OPEC’s September production increased by 160,000 bpd compared to August, mainly owing to Libya and Iran both of which are exempt from the quotas.
Libya will weigh on OPEC production going forward, as a blockade on oil facilities by warring factions was lifted and the country is currently producing around 300,000 bpd. According to Bloomberg, 1.8 million barrels are scheduled to leave Brega aboard three tankers later this month. It remains to be seen if the exports will happen.
The reason why rising Libyan production did not have a bigger impact on the market is that strike action in Norway and the resulting closure of facilities could take as many as 330,000 bpd off the market. However, labor disputes are temporary in nature, while Libyan production is likely to be more permanent as long as hostilities are kept at bay.
OPEC+ has done a great job bringing oil markets back from the brink from those days in April when WTI turned negative for a short time. Ministers will have big decisions to make when they meet on Nov. 30/Dec. 1. The program they had agreed on back in April foresees the current 7.7 million bpd of production cuts to be reduced to 5.8 million bpd from January through April 2021.
Looking at the demand picture, that may be challenging on one hand. On the other, it may also not be easy to keep countries at current levels of production. Oil companies in Russia are lobbying to open their taps. For many countries, the current volume restrictions have had a detrimental impact on their national budgets at a time when they are having to deal with the economic fallout of the coronavirus disease (COVID-19) pandemic. This has created its own set of domestic pressures.
It is beyond the shadow of a doubt that oil markets would not have started the rebalancing process without the forward-looking cuts from OPEC+, as painful as they are for all the members. However, as Prince Abdul Aziz said at last month’s JMMC, “full compliance is not an act of charity. It is an integral part of our collective effort to maximize the interest and gains of every individual member of this group.”
The issue is that supply is only one side of the equation and while OPEC+ does all it can to help oil markets rebalance over time, it has no sway over demand.
China’s economy seems to be recovering with its September manufacturing purchasing managers’ index (PMI) having risen to 51.5. Its economy is also expected to grow at 1 percent or above this year.
The reason why rising Libyan production did not have a bigger impact on the market is that strike action in Norway and the resulting closure of facilities could take as many as 330,000 bpd off the market.
Things look differently for the rest of the world. In its June outlook the International Monetary Fund (IMF) sees the global economy contracting by 4.9 percent this year and growing by 5.4 percent next. As the virus is not going away economic activity, travel, and cross-border air travel will take a long time to get back to 2019 levels. All of which is bad for oil demand.
Last week saw tens of thousands of jobs lost in the US alone and Europe is not far behind. Recent restrictions in New York and throughout Europe also do little to instill optimism. The unpredictability of the course of the pandemic is a key issue because it translates one for one into unpredictability of any economic recovery. It is not just the matter of getting to a vaccine and antiviral drugs or when they will be ready. It is also a matter of how quickly they can be disseminated throughout the world.
In the meantime, OPEC+ will hang in there, which may not always be easy to manage. However, as stated above, supply is only one part of the equation.