The oil market continues to get support from both expected and unexpected quarters. Yet the price level is stubbornly in a range previously forecast for some time now.
Since the beginning of October, prices of Brent, WTI and the Opec Basket have been hovering around $56 (Dh206), $50 and $54 a barrel respectively. Prices of these markers have been moving in tandem as expected, and the high differential between Brent and WTI can be explained by the higher WTI stocks at Cushing, Oklahoma, due to disruptions in US production and exports caused by the hurricane season.
The prices as I write are higher by a dollar to two a barrel, but well below the almost $59 a barrel for Brent on September 25. We are still in the range of $50-$60 a barrel and if things stay as they are, the majority view is this will be maintained to the year-end.
The support for prices is coming from a healthy demand growth, estimated by Opec and IEA at 1.6- and 1.5 million barrels a day (mbd), and a spike brought on during the cold fourth quarter. Non-Opec supplies are to grow by 0.7 mbd according to the two organisations. Which is much less than the demand growth and thus able to support prices.
While demand growth in 2018 is forecast at 1.4 mbd by both organisations, they differ widely in forecasts for the growth in non-Opec supplies — at 0.9 and 1.5 mbd for Opec and IEA respectively. Perhaps the difference comes from the perception of both towards the prospect of shale oil production in the US. In any case, demand and supply growth are much closer than in 2017, and to maintain the price level it requires Opec and contributing non-Opec producers to extend their accord beyond the end of March 2018.
All indicators point towards this extension happening during the next Opec meeting on November 30. Saudi Arabia and Russia have strengthened their relations through a high level summit and have indicated on more than one occasion an extension is desirable. Saudi Arabia is also cutting its exports in November by much more than its commitment.
The recent call of Mohammad Barkindo, the Opec Secretary-General, on North American producers to share the responsibility of supporting the market is interesting. He said that “We urge our friends in the shale basins of North America to take this shared responsibility with all the seriousness it deserves.”
I doubt if his call will be heeded, but some shale producers might slow down drilling especially when oil prices are at the current level and they are approaching higher costs.
More importantly, Barkindo said that “some extra-ordinary measures could be considered by countries participating in the “Declaration of Cooperation”, including expanding the membership.”
An Opec secretary-general does not come up with such a statement without the support of at least major Opec members. This is the strongest signal that the producers’ accord will be extended with the inclusion of perhaps Nigeria and possibly Libya.
Nevertheless, this sober view could be turned upside down in a very short time. President Trump has just declared the decertification of the nuclear deal with Iran, the targeting of its Revolutionary Guard and its clients in other parts of the Middle East. The US Congress is thereby asked to take appropriate measures against Iran.
It is not yet clear how this would affect the oil market, especially as Europe, Russia and China are still in favour of the nuclear deal and perhaps unhappy with Trump’s stand. However, if the previous sanctions are to snap back on Iran and Europe is to be affected by secondary sanctions and insurance is made difficult or impossible on Iranian oil shipments, the market can lose about a million barrels a day of supplies just as it did before the nuclear agreement in 2015.
Worse, if the new development turns into threats of violence by either party in an already inflamed Middle East.
Another uncertain factor is what is happening between the Iraq government and the regional government in Kurdistan. After the Barzani referendum for independence, the government in Baghdad is threatening to take control of Kirkuk oilfields and Turkey could close the export pipeline. In this eventuality the market could lose close to 0.6 mbd of supplies.
The market may be thrown into more volatility in the next few weeks and Opec and its associate non-Opec producers will be faced with a real dilemma if the above two geopolitical development evolve into anything more than a war of words.
— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.