An uneasy choice for OPEC+ nations

Wednesday, 2019-03-20 12:24:27
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Saudi Energy Minister Khalid al-Falih speaks to the media during Saudi government ministers brief in Riyadh, Saudi Arabia December 19, 2018. (Reuters)
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NDO – The Organisation of the Petroleum Exporting Countries (OPEC) and allies, including Russia, must make a decision on whether to continue pursuing an agreement to cut oil production to balance the “black gold” market and revive the world oil prices or not. This problem is not easily solved as they have to balance oil supply while other competitors in the market continue to increase their output.

The agreement on oil production cuts between OPEC members and its allies have helped to revive the “black gold” market as it has contributed to pushing oil prices up to a level that satisfies producers. However, this group needs to continue calculating their next steps in order to protect the interests of members as well as lead the oil market. Saudi Arabia recently said that it is not the time for OPEC to stop its efforts to rebalance the world crude oil market, as global crude oil producers continue to increase production despite US sanctions aimed at Iran and Venezuela. Russia, a major non-OPEC oil exporter, also stated that the agreement on crude oil production cuts will remain valid at least until June 2019, the moment when the US’s next steps to curb Iran and Venezuela’s crude oil exports become clearer. At a recent conference in the capital of Azerbaijan, which saw the attendance of ministers of some OPEC nations, Saudi Arabian Energy Minister Khalid al-Falih highlighted the need to maintain the reduction of oil production until this June, as well as to continue monitoring supply-demand and what to do for the second half of 2019.

Statements from these two major oil producers and exporters indicate the possibility that OPEC will extend the agreement to reduce crude oil production until the end of 2019. OPEC and some allies (OPEC+) have agreed to cut crude oil production by 1.2 million barrels per day, equivalent to 1.2% of global demand, from January 2019. As scheduled, OPEC will convene meetings this April and June to decide on the policies related to mining output. However, the OPEC+ group is forced to make calculating decisions for the next steps, in the context that its rivals, including the US, have quickly increased their crude oil exports under an excuse of offsetting the shortage of supply caused by sanctions imposed on Iran and Venezuela. Washington’s policy has led to new uncertainties for OPEC as this organisation has to make decisions aiming to balance supply and demand of the global crude oil market.

The fact that some OPEC+ producers comply with the production cut deal has somewhat supported the energy market. However, OPEC’s rivals continuing to increase crude oil output is causing the OPEC+ group to consider the continuous reduction of their oil production. As predicted by OPEC, producers outside the bloc will raise their output by 2.24 million barrels a day in 2019, an increase of 60,000 barrels from the previous forecast. In addition, other market indicators also show the prolonged concerns on oversupply, as the OPEC report states that oil reserves in January in the developed economies were higher than the average level of the last five years. This means the “black gold” market still faces the risk of oversupply, if OPEC maintains its February production. In the context that global oil demand is expected to grow modestly, the OPEC producers have agreed on the need to continue sharing responsibilities to avoid the repetition of the imbalance, while continuing to support the stability of the oil market. This group has been forced to consider a scenario of extending the production cut deal after this June.

As planned, OPEC will meet in April to discuss the aforementioned scenario, although Saudi Arabia announced that the final decision will not be made until the next meeting in June. The “oil king” continues to maintain its oil production at below 10 million barrels per day, lower than the maximum output of 10.311 million barrels per day agreed by Saudi Arabia and OPEC+ countries in the production cut deal. In the face of an uncertain prospect of the oil market, Saudi Arabia and Russia continue to “shake hands” to maintain stability in the energy market, an important factor for the world’s two leading oil exporters.