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Rising oil prices leads to rethink at OPEC
June 2, 2018, 3:59 pm

Oil prices that briefly flirted above $80 per barrel last week have led to calls by Russia and other leading OPEC members to reexamine the current high prices and lower it to levels that will ensure long-term sustainability of their resources.

Recent comments by Saudi Arabia’s oil minister Khaled AlFalih that OPEC and key non-OPEC members will “likely” increase production in the second half of 2018 to “ease market and consumer anxiety” over high prices, triggered a market sell-off last week that saw Brent decline by almost three percent on Friday, breaking a run of six consecutive weekly gains. Prices were also under pressure earlier in the week after the US-based Energy Information Administration (EIA) report showed a surprise increase in US crude inventories by 5.8 million barrels to reach 438 million barrels. Crude production in the US also increased 200,000 barrels per day (bpd) following a further increase in oil rig count.

Nevertheless, oil prices continue to remain14 percent higher than at the start of the year and nearly 50 percent up on a year ago. The remarks by the Saudi oil minister, which followed a meeting with his Russian counterpart, Alexander Novak, on 25 May, could probably be the first step in a concerted bid to pull the plug on the recent hike in oil prices. Fears that high prices could eventually undermine longer-term global demand was cited as one of the reasons for increasing production. Equally important was declining oil production in Venezuela and Nigeria, as well as worries about US sanctions on Iranian oil production.

OPEC’s oil production dropped in May by 70,000 barrels per day (bpd) to reach 32 million bpd, its lowest level since April 2017. The production drop came mainly from production declines in OPEC members, Nigeria and Venezuela. A survey by Reuters shows that in May, Nigerian oil production suffered setbacks through unplanned shutdowns in pipeline flows and delays in loading, which resulted in a drop of nearly 100,000 bpd from the 1.94 million bpd production in April. Meanwhile, production in Venezuela declined a further 50,000 bpd to reach 1.45 million bpd, this compares to its annual production target of 1.972 million bpd. In effect, Venezuela’s ‘involuntary’ cut in production was larger than the daily cuts pledged and achieved by Saudi Arabia, the world’s largest producer.

Compensating for this production fall, Saudi Arabia and Iraq, the second-largest oil producer in the OPEC cartel, raised their production slightly in May while keeping within their respective OPEC-mandated production volumes. Saudi Arabia stayed within its quota despite its production touching 10 million bpd because more crude oil was consumed domestically by power plants. Indicators now show that an additional one million bpd of production could be released in the second-half of 2018, probably following OPEC’s biannual ministerial meeting scheduled for 22 June.

In its Monthly Oil Market Report for May, OPEC also revised up its global oil demand by 25,000 bpd from its April assessment. The upward revision was the result of firm OECD data for the first quarter of 2018, as well as better-than-expected data from Asia and from Latin America. The cartel also marginally revised the forecast for non-OPEC oil supply by 10,000 bpd compared to last month’s report and now expects non-OPEC supply growth at 1.72 million bpd year-on-year in 2018. Another highlight in the May report was that total OECD commercial oil stocks — the cartel’s current metric for the production pact’s success — were just 9 million barrels above the latest five-year average.

Meanwhile, the higher oil prices are boosting the credit profile of many oil companies and allowing them to negotiate refinancing their debt on more favorable terms. These loans, $138 billion of which is due to mature at the end of this year, and another $400 billion by the end of next year, were taken out in the exuberance of high oil prices that existed between 2012 and 2014.

According to the latest regional economic outlook published by the National Bank of Kuwait (NBK), the leading public lender in the country, the recent high oil prices have also helped credit default swap (CDS) rates — a financial measure of the debt risk of corporates or countries — to decline for most GCC sovereigns in the first-quarter of 2018. Except for Bahrain and Oman, the credit ratings and outlook for the other four GCC states have remained largely unchanged.

Continued large fiscal needs, prospects of higher rates and relatively easy market access have favored the front-loading of GCC borrowing in 2018. Both Saudi Arabia and Qatar issued bonds for $11 billion and $12 billion respectively in the second-quarter of this year. Both the bonds were swapped up by the market, reflecting a strong appetite for GCC sovereign debts. With competitive pricing for both issues, the Saudi order book topped at $50 billion, and Qatar’s reached $52 billion.

In its report, the NBK noted that Bahrain’s attempt, however, was not as successful, with investors turning down its conventional bond due to unfavorable pricing, while its subsequent sukuk was priced at a steep increase from the previous issue. In Kuwait, delays in passing a new debt law could also see the state turn to its own reserves to fund the estimated $10 billion deficit for 2018. 

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