As long as I can remember, no Organisation of Petroleum Exporting Countries (Opec) conference has been disregarded by the market as much as the 169th one, held in Vienna on June 2. It was a non-event as far as oil prices were concerned as Opec decided not to make any decision regarding the level of production or its quota distribution.
But the conference did show some measure of unity in announcing the appointment of Mohammad Barkindo of Nigeria to the post of Secretary-General, a decision delayed many times in the past. There were no acrimonious statements from ministers at the end of the conference as they decided to keep the underlying differences away from the media.
The result was influenced by rising demand, declining non-Opec supplies and the 80 per cent price appreciation from the January 2016 level, with an Opec press release describing the situation as “relatively healthy considering recent economic challenges and developments”.
Nevertheless, the conference noted that OECD stocks are “well above the five-year average and these need to be drawn down to normal levels”.
The absence of non-Opec members, especially Russia, meant the previous understanding about a production freeze is no longer on the table. Iran refused to be included in such a scheme and asked for a production ceiling and individual country quotas, but admitted that it is not possible to agree on such scheme now.
This prompted MEES to say “Opec is unable to manage the oil markets and reach a consensus on anything of genuine importance” and that “Opec is becoming little more than a talking shop”, though the new Saudi oil minister said “it’s going to do a lot more than talking.”
Put in conciliatory language, the conference called for continued dialogue with non-Opec producers and confirmed its commitment to a stable and balanced oil market. It asked the Secretariat to “if necessary recommend to member countries to meet again and suggest further measures according to prevailing market conditions.”
Therefore, until the next meeting in November, the market shouldn’t expect much, especially as oil prices continue a slow rise after the meeting. Brent crude oil price stood at $51.44 (Dh189) a barrel on June 8 and the average for May was $47 a barrel, $5 above April.
The Energy Information Administration said “growing global oil supply disruptions, rising oil demand and falling US crude oil production contributed to the price increase”. But it still said “Brent crude oil prices are forecast to average $43 [per barrel] in 2016 and $52 [per barrel] in 2017” to cover for lower oil prices earlier in the year and ruling out much higher oil prices for the remainder of 2016.
The summer driving season around the world may raise gasoline demand and increase refinery runs and thereby reduce the overhang of crude oil inventory. Especially if supply disruptions continue further. Crude oil stocks in the US are 535.7 million barrels for the week ending May 27, which is 32.8 per cent above the five-year average.
Therefore supply pressures remain a concern.
In any case, the claim that Opec policy is working in gaining market share at reasonable prices needs to be tested because the price appreciation is due to supply disruptions in Nigeria, forest fires in Canada, the short-lived strike in Kuwait, continued turmoil in Libya and declining output in Venezuela. There were times when these disruptions amounted to more than 3 million barrels a day (mbd). When these are removed, prices are likely to go down.
At the same time production increases in Russia, Saudi Arabia and Iraq cannot be ruled out. Iran’s production has already increased by 460,000 barrels a day since sanctions were lifted in January and further increases may be forthcoming.
Increases in oil prices are likely to bring back drilling for shale oil in the US, where rig count is already heading upwards though slightly. The EIA is forecasting 2016 crude output at 8.6-mbd, down from 2015’s record of 9.43-mbd with a further 400,000 barrels a day fall forecast for 2017.
While Opec and IEA kept their demand growth at 1.2-mbd this year, the EIA recently updated its estimate to 1.4-mbd and increased the 2017 forecast to 1.5-mbd, all on increased demand from China and India.
The oil price level may look comfortable to oil producers, but there is so much uncertainty around and things could look differently in the coming months. It has always been risky to predict the direction of the oil market and for other commodities as this is related to so many fundamentals and geopolitics.
If some of the current supply disruptions are corrected and increased production from other countries forthcoming, then prices are bound to move south and producers must stay vigilant.
In the long run, however, there is no cure for oil producers except to modernise and diversify their economies and conserve energy as much as possible in their own domain.