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OPEC+ Necessary For Stability In Oil Markets – OpEd


By Cornelia Meyer*

The oil price has gained around 23 percent since Jan. 1. There were bearish moments between mid-January and the first half of February, which were partly due to heightened fears of what trade wars would do to supply chains and shipping goods. The last few days have seen something of a rally, with Brent reaching nearly $67 per barrel in early Asian trading (up more than $2 from Friday). 

Sentiment changed markedly when US Treasury Secretary Steven Mnuchin made positive statements about progress being made in trade discussions between the US and China.  

However, the sword of Damocles, or rather President Donald Trump, still hangs over US-China trade relations. If there is no breakthrough by March 1, he might increase tariffs on $200 million of goods from 10 to 25 percent. Then again, he may extend the deadline. In other words, what happens this week in Washington will have huge ramifications on market sentiment, and with it the oil price. 

It is not just of relevance to business in the US and China. When the two largest economies in the world are at loggerheads, everyone suffers, especially highly integrated ones such as Germany and Canada. This market sentiment will influence where oil prices are headed.

Venezuela’s crisis and US sanctions have taken barrels out of the market, as have American sanctions on Iran. According to the Organization of the Petroleum Exporting Countries (OPEC), Venezuela’s January production stood at 1.1 million barrels per day (bpd), compared with 3.4 million bpd at the beginning of the late Hugo Chavez’s presidency. 

Some analysts expect February production to fall by 300,000 bpd due to US sanctions. We can expect Venezuela to have a bullish impact on the oil price as long as the crisis there is not resolved.

What really influenced sentiment as well as barrels was OPEC’s ability to deliver on its deal with 10 friendly non-members led by Russia. On Dec. 7, 2018, OPEC+ agreed to take 1.2 million bpd out of the market — 800,000 bpd from OPEC and 400,000 bpd from non-members. 

According to the International Energy Agency, January compliance stood at 78 percent for OPEC and 25 percent
for non-members. Saudi Arabia and the UAE went beyond the required cuts. 

Prices experienced a boost when Saudi Energy Minister Khalid Al-Falih announced that the Kingdom would curtail its production to 9.8 million bpd in March. This would mean a Saudi cut of 500,000 bpd above its December promise. 

On the non-OPEC side, markets were encouraged when Russian Energy Minister Alexander Novak vowed to improve compliance with the December agreement. He said if Russia and its nine allies had not started their cooperation with OPEC in December 2016, the oil price might well have dropped to $25 per barrel at that time.

This month and last week proved that the OPEC+ alliance is needed to keep the oil price in a reasonable bandwidth. There will always be market sentiment and peaks and troughs. But if there is no force to counterbalance them, it will become all but impossible for oil companies to plan and adhere to their investment programs, and for consumers such as airlines to budget. 

As Al-Falih says, OPEC+ is trying to balance markets for producers and consumers alike. He is joined in this sentiment by oil company executives such as BP CEO Bob Dudley, who is a big advocate for oil to trade in more or less predictable ranges. 

The industry needs trillions of dollars of investment in the coming decades if we do not want the lights to go out and transportation to cease. The wise words of Al-Falih and Dudley reflect the basic conditions required to get there.

  • Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources

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Arab News

Arab News is Saudi Arabia's first English-language newspaper. It was founded in 1975 by Hisham and Mohammed Ali Hafiz. Today, it is one of 29 publications produced by Saudi Research & Publishing Company (SRPC), a subsidiary of Saudi Research & Marketing Group (SRMG).

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