The latest Opec meeting ended in some confusion on Friday with different numbers quoted for the planned production increase. It appears that a target increase of 1m barrels per day has been set but that some countries will be unable to meet that level, making a net increase of about 700,000 barrels per day coming largely from Saudi Arabia the most likely result.
Brokered by Algeria, the deal to cut production volumes – following OPEC’s 2014 attempt to break the US Shale-Oil industry by permitting the global supply overhang – nears its official end in the second half of the year. Questions over the future of OPEC production, in light of OECD crude oil stockpiles falling below the Cartel’s targeted five-year averages, now lingers over the market.
This perhaps applies even more to the future price trajectory for the globally traded ‘Black-gold’ going into 2019.
The OPEC strategy now has stockpiles nearing the five-year average oil storage levels of the Organisation for Economic Co-operation and Development (OECD) countries. In late-June, Russia and Saudi-Arabia led the push to increase the production by around 600,000 barrels per day (bpd). The impact of returning Crude oil flows from the world’s two largest oil producers (combined total output of over 21 million barrels per day) may still hold influence over Brent Crude prices in light of recent supply-side tensions and shocks out of Venezuela, Libya, Angola and Nigeria. However, when looking at the world outside of the OECD, where +80 percent of Oil demand growth and the bulk of Non-OPEC supply has come from, further questions have been raised over OPEC’s chosen metric for success with regards to long-term sustainability or effects i.e. not undoing the result of its 2016 ‘Algiers Accord’.
Additionally, the current Venezuelan sanctions against the incumbent communist government of President Maduro prohibits buying or accepting as collateral any debt owed to the government or state owned PdVSA. This not only adversely impacts one of OPEC’s largest member’s upstream activities, further weighing output levels lower by 600,000 bpd, but also lead to the retraction of production volumes half amounting to almost half of OPEC’s agreed total reduction of 1.2 mbpd.
The newly proposed increase to production levels may simply help mitigate those recently displaced supplies. Alternatively, it may bring OPEC closer to the standard 100 percent compliance levels come 2019, should opposing member states opt out of the crude booster plan.
Further to this, Saudi Arabia’s Oil Minister, Khalid Al-Falih, raised the need to explore alternative metrics to measure the impact and effectiveness of the 2016 production cut deal ahead of the late-June meeting. A meeting with the primary goal to discuss OPEC’s ‘Exit Strategy’ after two steady years of crude oil price increases from the depths of $27 (from January 2016) to an average of over $70 through 2018 thus far.
OPEC’s target of the OECD’s five-year average oil stock levels, which may have been reached, remains largely ignorant of the key issues surrounding the world’s oil cartel and the factors behind its lost market share.
Even the OECD five-year average storage level target comes with its own elements of complications and concerns. The concerns mainly revolve around the fact that it’s a backward-looking indicator (two-month delay for data update) with transparency issues regarding the level of accuracy in assessing, measuring oil volume stored at sea and cargoes currently in transit.
Overall, Crude oil prices may show weakness through the second half of 2018, with the prospect of OPEC production growth mostly influencing market psyche into a ‘Bearish’ mode. This should reduce recent supply restrictions in the face of growing global consumption levels.