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OPEC hints oil to go up, market says no
February 22, 2018, 9:33 am

International Petroleum Week (IPW), arguably the most important annual event in the global oil and gas calendar, opened in London on 20 February.

Hosted by Energy Institute, the professional body for the energy industry, the annual IPW gathering brings together experts from the global oil and gas industry to share their wealth of knowledge and experience with fellow experts.

The annual IPW is also the venue where latest news and trends on the oil and gas front can be discerned, and where nuggets of information on the future direction of the industry are revealed, sometimes inadvertently, but more often with the aim of influencing the market.

This year’s IPW was no different. In a news briefing, Ayed Al Qahtani, who heads OPEC’s research group, hinted that OPEC-mandated production-cuts have led to OECD inventories falling to barely 74 million barrels above the benchmark five-year average recorded in January 2017.

He added that when the oil output reduction agreement between OPEC members and several non-OPEC countries came into force at the start of 2017, OECD inventories were 340 million barrels above the benchmark.

Adherence to the production-cuts by participating nations “has been very successful in withdrawing the overhang”, said Al Qahtani. Since implementation of the production trimming agreement, OPEC members have been cutting 1.2 million barrels per day while non-OPEC countries have trimmed a further 600,000 barrels daily, to remove a total of 1.8 million barrels per day from global stocks.

The result has been a rise in international oil prices. Also at the IPW, the Energy Minister of UAE, Suhail Al-Mazrouei, disclosed that OPEC and non-OPEC producers will be drafting a plan this year to extend their cooperation and institutionalize their current collaboration to form a ‘super-group’ of oil producers led by Saudi Arabia and Russia.

The UAE minister, whose country is currently holding OPEC’s presidency, said that OPEC Secretary-General Mohammad Barkindo would hold discussion with other member states during the course of the year to draft a charter that would be acceptable to all nations involved in creating this mega cartel.

Thousands of attendees to the three-day IPW gathering, as well as market-analyst long accustomed to viewing Saudi Arabia as a moderating influence in OPEC, were rattled by the Saudi Energy Minister Khalid Al-Falih’s statement earlier in the week.

The minister said that oil producers should keep cutting production for the whole year, even if it causes a small supply shortage. “If we have to overbalance the market a little bit, then so be it,” Al-Falih told reporters in Riyadh last week.

For decades, Saudi Arabia was the voice urging restraint within OPEC and countering the more strident calls from Venezuela, Iran and others for higher prices. In the 1970s, the then Saudi Oil Minister Sheikh Ahmad Zaki Yamani warned fellow OPEC members that their wave of oil-price hikes would backfire.

He was proved right as consuming nations developed energy reserves and OPEC’s market share stagnated for years. Similarly, in 2008, when oil surged to almost $150 per barrel, Ali al-Naimi, the then oil minister of the Kingdom urged fellow-members of OPEC to cool down the situation.

But his voice of reason was drowned by opposition from other member states who wanted the windfall prices to continue for longer. Prices plummeted the next year and the world economy was left in the shambles of the ‘Great Recession’.

Today, more than a decade of recession later, as the global economy slowly begins to gain traction, the oil dynamics looks set to change once again. In January 2017, when Brent crude went over $70 per barrel, Bijan Namdar Zanganeh, the Iranian oil minister is reported to have said that $60 was the right price for both suppliers and consumers. But Saudi Arabia, emboldened by the success of OPEC’s production-cut strategy urged for a higher $70 ceiling.

The Saudi insistence on higher prices come as pressure mounts on the Kingdom, which is embarking on sweeping economic reforms through its ‘Vision 2030’ plan, while having to maintain its traditional social largesse to citizens.

Underpinning the ‘Vision 2030’ strategy is a plan to launch an initial public offering (IPO) for state oil company Aramco, believed to be one of the largest companies in the world in terms of revenue. Having a higher oil price is critical to the Kingdom’s estimates of garnering at least US$2 trillion from the Aramco IPO.

However, standing in the way of the Saudi hopes for higher prices is increasing shale oil production and export in the United States. Recovery in Brent crude prices has stimulated a simultaneous record shale oil production in the US and the country is on track to surpass both Saudi Arabia and Russia as the world’s biggest crude producer this year. Last week, the first fully laden supertanker sailed from the Louisiana offshore Oil Port, the lone deep water port in the US, headed for China.

The shipment using a Very Large Crude Carrier (VLCC) marked the opening of a bottleneck that had hampered overseas shipment of US shale oil. Using VLCC, cuts shipping costs significantly and makes US shale oil competitive on Asian markets.

Ironically, Shaden, the supertanker that loaded US shale and set sail for China, was flying the Saudi flag and belonged to the Kingdom’s National Shipping Company.

Alongside the growth in US oil output, the higher price environment is also encouraging other non-OPEC exporters, such as Brazil and Canada, to ramp up production through new projects.

Given the opposing market forces of OPEC-mandated production cuts and the surge in US shale production, industry analysts now believe that oil prices are likely to remain below the $70 per barrel threshold in 2018.

- Staff Report

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