Opec and partners must maintain market status quo

The global oil markets have no control when confronting multiple economic and geopolitical factors, which have had serious repercussions on the economies of oil producing countries despite trying their best to cope with such periodic crises.

Yes, for a change, some of these countries did manage to handle the most recent oil crisis better, thanks to coordination among Opec+ countries. Yet, the challenges facing such a coordination are growing due to rapid economic developments outside the influence of these oil producing states.

For example, the price of Brent crude fell below $60 a barrel, despite the renewal of the production cut agreement by Opec+. In addition, oil prices have taken a different path unlike in the past, when they go up in the third quarter in preparation for winter and the consequent increase need for stockpiling by consumer countries.

The usual dynamics are not working

This was in fact a major factor boosting demand at this time of the year. But the latest data suggest otherwise. Stocks are generally adequate, which has kept demand at previous levels, helped by increased supplies from the production of shale oil.

The decline in Iranian oil exports by 2 million barrels a day as well as dumping by some shale oilfields due to low prices have not had much impact on the market. On the contrary, the gap resulting from the drop in Iranian exports was bridged by surplus capacity in other oil producing countries.

Shale field closures have not helped so far

The closure of some oil shale fields has not contributed to declining production. Yet, production at other fields, where production costs do not exceed $35 a barrel, have continued due to technological advances and relatively easy production conditions compared to the fields that were closed.

These are real challenges that Opec+ countries need to deal with to preserve their interests while maintaining fair prices ... despite the obvious difficulty of this task. There are many factors that do not help maintain the market’s balance, including slower global growth and the trade war between the US and China, as well as the huge and continued flow of shale oil.

This has resulted in Opec issuing a pessimistic report for the oil market for the remainder of this year and 2020 for the first time last week. This is in part because demand has dropped in the second-half of the year by 40, 000 barrels per day, while it will not exceed 1.14 million barrels in 2020, a low level compared with the average in the earlier part of this decade. Opec has also undercut its global growth forecast to 3.1 per cent next year.

It is obvious that Opec does not have much by way of options as evidenced by its pessimistic report. However, it still has a strong option to maintain current prices at $60 a barrel, a price acceptable to all parties, through coordination among Opec+ members led by Saudi Arabia and Russia.

The continued coordination will ensure maintaining production cuts as per the existing agreement, which will be extended when it expires next March. Opec+ might also agree on new cuts if oil prices deteriorate further in the coming weeks.

Certainly, there are caveats, but this option is the best available. Failure to take such a step would mean the collapse of prices to $30 a barrel, which would result in heavy losses for most exporting nations and which they would not be able to tolerate. If Opec+ countries move ahead with this option, oil prices and markets will remain balanced at current levels It is true that Opec+ countries may lose part of their market share to other exporters, but this loss would not be comparable to the losses that would result from collapse in prices. This market share can be recovered if the global economy overcomes its current crisis — which will happen anyway — leading to increased economic growth and higher demand for oil.

This also means that the agreement by Opec+ is a safety valve to safeguard the interests of all oil producing states.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.