With oil inventories still bloated, OPEC ministers are signaling not to expect any changes to their production cut agreement when a monitoring committee meets Sunday, despite the recent run-up in prices that has given momentum to forecasts of a US shale resurgence.
The rapid rise to about $70/b — 10% higher since OPEC’s November 30 meeting — “was not expected, quite frankly,” Nigerian oil minister Emmanuel Kachikwu said Saturday at an Atlantic Council energy forum in Abu Dhabi, though he said it was “fantastic.”
OPEC would now aim to “try and protect” current price levels, he said, though the primary focus is to foster a balance between encouraging companies to invest in oil development, while not blunting global economic growth.
“The resolve is to have a reasonable figure that allows investment and at the same time allows consumers some number that allows them to be comfortable to be good consumers,” Kachikwu said. “That number is somewhere in the $60s.”
As such, he said he would be in favor of “no action, really,” when the monitoring committee meets in Oman to review the deal and assess market conditions.
“Right now, the fundamentals are still the same,” he said. “We shouldn’t get too bullish or excited yet. Things can change overnight.”UAE Energy Minister Suhail al-Mazrouei, speaking at the same event, noted that inventories are still some 100 million barrels above the targeted five-year average and that the market was “still correcting itself.”
“My expectation is to stay the course,” said Mazrouei, who assumed the rotating OPEC presidency this year. “We will meet in Oman next week and take a look. I’m not expecting us to make some changes because of a week or month” of data.
The deal calls on OPEC and 10 non-OPEC countries led by Russia to cut a combined 1.8 million b/d through the end of 2018, as the producer nations seek price stability.
But oil prices are hovering near three-year highs, and the US oil rig count in the past week increased 10 to 752, the biggest rise since June, according to service company Baker Hughes. The US Energy Information Administration on Tuesday forecast that US production would average 10.3 million b/d this year, a 400,000 b/d upward revision from December’s projection.
With ICE Brent futures prices having increased more than 50% from their 2017 low in June, Iranian oil minister Bijan Zangeneh on Tuesday warned of overshooting, saying that “OPEC members are not much keen on seeing oil prices rising too much above $60/b because of shale.”OPEC is facing some potential supply challenges ahead, however.
Helima Croft, global head of commodity strategy with RBC Capital Markets, said that much of OPEC lacks the capacity to boost production significantly to take advantage of higher prices and compete for market share against growing US shale supplies.
Venezuela’s production has declined precipitously due to a severe economic crisis and mismanagement of state oil company PDVSA, with analysts seeing scant prospect of any near-term recovery.
Iran is also facing the prospects of renewed US sanctions on its oil sector. US President Donald Trump on Friday issued a 120-day waiver of the sanctions but warned that it would be his last such waiver, unless Congress and European allies fix what he says are severe flaws in the nuclear deal.
The EIA has estimated OPEC’s spare production capacity at 2.11 million b/d, all in the Middle East.
The International Energy Agency has a higher estimate, at 3.41 million b/d as of November. Of that, 2.23 million b/d is in Saudi Arabia, OPEC’s de facto leader whose energy minister, Khalid al-Falih, has pledged to maintain output discipline while the production cut agreement remains in effect through 2018.
Much of the rest of the IEA’s estimate of spare capacity rests in Saudi Arabia’s close Gulf allies, including Kuwait (230,000 b/d) and the UAE (300,000 b/d).
“This issue of cheating [on quotas] has been a bit overblown,” Croft said at the Atlantic Council event, which was webcast. “It’s a small number of countries that could really ramp up production.”
Mazrouei agreed and said there are “issues with so many countries in terms of will we see the same production or will we see a decline.” Compliance with the OPEC/non-OPEC cuts was 122% in November, and when the monitoring committee reviews the December numbers at Sunday’s meeting in Oman, he said he expects compliance to be even higher.
OPEC Secretary General Mohammed Barkindo said 2018 demand for crude could come in even stronger than the current 1.5 million b/d growth above 2017 levels that the secretariat is projecting. That would accommodate any growth in US shale supplies, while keeping prices elevated.
“Global economic growth hasn’t been this healthy since the last financial crisis,” he said.
–Herman Wang, email@example.com
–Edited by Maurice Geller, firstname.lastname@example.org