The 1.2 million barrels-per-day (b/d) cut in oil production instituted by the Organization of Petroleum Exporting Countries (OPEC) and some non-OPEC countries from January of this year has seen crude oil prices jumping by 27 percent from their lows in December 2018.

While official figures are not yet available, survey data shows a drop in OPEC output of 1 million b/d in January. The major slash in production has come from Saudi Arabia, which is reported to have cut production by 0.4 million b/d, deeper than targeted. Many analysts, oil company representatives, and OPEC officials, buoyed by recent rise in crude prices are already predicting even higher prices in the months ahead. While this optimism may have some grounds there are heavy headwinds ahead.

Kuwait which remains committed to OPEC mandated production cuts has seen its crude output fall even as the price of Kuwait Export Crude (KEC) jumped by 17 percent in January and more than recouped the losses sustained in December. In compliance with production cuts, Kuwait is expected to curb production by 85,000 b/d to 2.72 million b/d, which would leave crude output down around 1 percent on average in 2019 from a 1.4 percent increase last year.

However, Kuwait’s ability to sustain its economic growth in the face of production cuts are dependent on continued higher oil prices on the international market, and ramping up production from the contentious divided zone that it shares with Saudi Arabia. Production from the divided zone has been in limbo for the last few years, as both countries attempt to reconcile their differences.

In a recent media interview, Kuwait’s Minister of Oil and Electricity Khalid Al-Fadhil said that the relations between Kuwait and Saudi Arabia were strong enough to withstand their differences over the divided zone. He cited Saudi Oil Minister Khalid Al-Falih’s statement that all matters related to the divided region would be resolved during the current year.

On the question of what he would consider the ideal oil price for Kuwait, Al-Fadhil said that what was important was to have a balanced oil price that benefits both the consumer and the producer. “As an oil producing country, we are not worried about a specific price, but what matters to us is that there is stability in the price and that it is satisfactory to all stakeholders.” He added that the a price between US$60 to $70 per barrel is good for both producers and consumers.

While the OPEC-mandated production cuts that came into effect since January have had a significant role in recent price increases on the global market, it is not the only reason for the rise in oil prices. Tightening of the sanctions screw by the US on recalcitrant Iran and Venezuela has led to oil production tumbling in Venezuela, and oil exports falling in Iran.

A decade ago, Venezuela’s output was 2.6 million b/d, third in OPEC behind Saudi Arabia and Iran. After five years of decline, today it is the eighth largest producer. But production, which was just under 2.0 million b/d in third-quarter of 2018 has skid precipitously in the last six months. Output has plummeted by over 0.5 million b/d to reach 1.4 million b/d and is forecast to be only about 1.2 million b/d by the end of 2019 — if the government led by President Nicolas Maduro manages to hold out that long.

On a similar vein, Iran’s crude oil production declined by about 1.04 million b/d in early 2018 to about 2.77 million b/d in December. Since the US began tightening its sanctions from November 2018, oil exports are likely  to plunge further during the year, with the Iranian government now saying that it expected to export only 1.54 million b/d during the next financial year starting on 21 March.

Also, the US government is unlikely to extend past May 2019, the six-month exemption waiver that it had issued to eight countries—China, Greece, India, Italy, Japan, South Korea and Taiwan, which allowed them to continue buying Iranian oil. This would further hamper the flow of Iranian oil exports and unintentionally help decrease the glut that OPEC alleges is present in the global marketplace.

Despite best attempts by OPEC and market enthusiasm for higher oil prices, there are headwinds blowing that many analysts have ignored. Oil prices still remain subject to market vagaries. Last week, crude oil ended on a weaker note as data from China revealed a fall in both exports and imports, as well as relatively poor jobs figures in the United States, and news that Norway’s sovereign wealth fund had begun the process of slowly divesting from the oil sector.

China’s trade surplus shrank sharply in February, as exports slumped by more than 20 percent year-on-year. Imports were also down year-on-year for the third month in a row. Meanwhile, official figures show that in the US, only 20,000 new jobs were created last month against expectations of 180,000 jobs. It is the lowest growth in non-farm payrolls since September 2017 when employment was affected by Hurricanes Harvey and Irma.

Chinese trade figures, along with news that the US economy created the lowest number of jobs for a year-and-a-half in February, fueled new fears about prospects for the global economy, and consequently the price of oil for the rest of the year. Adding to future woes for oil, the increasing call for greener energy in Europe and elsewhere.

Norway’s Finance Minister, Siv Jensen announced last week that the country’s US$1 trillion sovereign wealth fund — the largest in the world — would begin to slowly divest from the oil and gas producers. “The ministry recommended the divestment in order to avoid the risk of volatile and low oil prices. The goal is to make our collective wealth less vulnerable to a lasting fall in oil prices,” said the finance minister.

Though Norway is one of the largest oil and gas producers in Europe, and the country’s sovereign wealth fund owns $37 billion in oil and gas shares, the government’s decision to gradually exclude oil producers from its investments highlights the general anxiety that global investors have on the longevity of the oil business.

On a related front, it is interesting to note that even as demand for gasoline and diesel are slowing in China, crude oil imports have been steadily rising. According to Chinese customs authorities, the country’s crude oil imports rose by 22 percent year-on-year in February to 10.23 million barrels per day — their third highest level ever.

This apparent anomaly could be explained when one realizes that Chinese refiners are increasingly processing crude into refined products such as gasoline and diesel and exporting them, adding to the global oversupply of gasoline and other refined products. With even more refining capacity set to open this year in China, there are very real fears that the global glut in gasoline and other refined products could drag down the entire sector.

There are also fears that China’s crude oil demand could peak by 2025 as demand for electric vehicles (EV), of which the country is currently the leader, hits the roads in greater numbers and peaks by 2025. In its analysis on rising EV demand in China, Morgan Stanley, the US-based multinational investment and financial services was more bullish, saying peak demand for EV could arrive even earlier and that “refiners and petroleum stations are the largest potential losers, while the battery companies are likely to become the key winners.”

– Staff Report

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