OPEC+ benefiting producers and consumers alike
As OPEC oil ministers gathered in Vienna for their meetings and consultations with their non-OPEC allies, commonly referred to as OPEC+, the oil price reached a five-year high on the back of on two news items.
Firstly, the truce on trade wars between US President Donald Trump and his Chinese counterpart Xi Jinping was good news for oil demand. Trump vowed not to raise tariffs on $350 billion of imports from China for now. He also allowed US manufacturers to sell to Huawei again. Chinese PMI data on Monday showed that trade wars had clearly taken a toll on the country’s economy, which in turn was bad for many other economies in Southeast Asia and Europe that trade with China. While the two presidents agreed on a temporary truce, we will have to wait and see how things will evolve down the road. The markets, though, gobbled up the good news.
Secondly, Crown Prince Mohammed bin Salman and Russian President Vladimir Putin agreed on the sidelines of last week’s G20 summit to roll over the OPEC + production cuts, which had been agreed in December and were to expire at the end of June. They envisaged a rollover of six to nine months. This is significant because Russian Energy Minister Alexander Novak was under pressure from producers in his country who sit on newly built capacity that they want to unleash on the markets. The decision was certainly aided by the quality issues the country faces in its Druzhba export pipeline.
The price of Brent reached $66.4 per barrel in early Monday trading — a five-week high — after two weeks of steady gains due to geopolitical tensions in the Gulf and falling US inventories.
Both consumers and producers benefit from the continued cooperation of OPEC+.
It is crucial that the production cuts are rolled over when looking at the expected increase of non-OPEC production for 2020, which stands at 2.3 million barrels per day (bpd), according to the International Energy Agency. If we are to believe the organization, which also downgraded its forecasted demand for 2019 to 1.2 million bpd due to slower economic growth, the call on OPEC crude will be around 600,000 barrels below current OPEC production in 2020. This is quite worrisome, as OPEC + exceeded its 1.2 million bpd production cuts by 68 percent in May. Indeed, the production of Venezuela and Iran alone is, for instance, 2.5 million barrels below 2017 levels due to the US sanctions on Iran and the deteriorating economic situation in Venezuela.
The MBS-Putin agreement is important and set the tone for Monday’s and Tuesday’s OPEC+ meetings. It emphasized explicit Russian support for the alliance, expressed at the highest level, despite the trade war truce, which removed one of the main threats to oil demand, albeit temporarily.
What ministers will have to ask themselves, not necessarily this week but further down the road, is whether a 1.2 million-barrel cut is sufficiently large in light of the ever-increasing non-OPEC production. Last week alone, the US increased its crude exports by 348,000 million bpd and lowered imports by 812,000 bpd.
Ministers will also discuss the formalization of the declaration of cooperation, which is the loose agreement that has bound together the 24 countries of OPEC+ since 2016. In an ideal world this would be important for two reasons. Firstly, it takes ambiguity out of the arrangement. Up to now, pundits speculated before every meeting whether Russia was onside or not. Secondly, a formal agreement would make it easier for OPEC+ to act with speed when incremental barrels need to be added to or taken off the market. For the last three years, it was OPEC+ that acted to ease supply and demand pressures as and when they occurred. This was important in light of heightened volatility due to geopolitics and the ever-shifting macroeconomic outlooks.
BP CEO Bob Dudley and his counterpart at Shell, Ben van Beurden, reiterated the importance of oil trading in a predictable range for the purposes of investment allocations in June. The same is true for consumers, who need to have parameters allowing them to estimate what proportion of the operating budget has to be allocated to fuel or feedstock. This holds especially true for heavy consumers such as airlines or petrochemical companies. In other words, both consumers and producers benefit from the continued cooperation of OPEC+.
• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources