OPEC members and their Russia-led non-OPEC allies have yet to decide how to share the 1 million bpd production boost they pledged in June. when they saw the market started to tighten too quickly which pushed oil prices to $80 a barrel—potentially ringing in the beginning of demand destruction.
At a meeting this weekend in Algiers, OPEC and allies are expected to tackle the issue with the distribution of that 1 million bpd production boost, but the cartel and its key non-OPEC partner, Russia, are looking (years) beyond the short-term production quotas.
They want long-term control over the oil market and oil prices, although their preferred wording is ‘market stability and balance’.
Robust global oil demand is beginning to face some headwinds as a result of factors that we have little or no control over, OPEC Secretary General Mohammad Barkindo told Bloomberg in a recent interview in Dubai.
OPEC is looking forward to continuing to work together with its non-OPEC partners, not only to strive to keep the supply-demand balance, but also to ensure that this equation remains favorable not only for producers, but also for consumers, OPEC’s chief said.
“Our ultimate objective as a producer group is to see that, despite the urge for diversification of the sources of energy, of which our member countries also play a role; we would like to see oil continue to be the energy source of choice for the foreseeable future,” he added.
Asked about the future of the OPEC/non-OPEC production cut deal that has been in place since January 2017, Barkindo told Bloomberg:
“There is no viable alternative on the table other than to institutionalize and make this cooperation between ourselves and our good partners from non-OPEC in a permanent fashion.”
The oil industry needs it, and we are beginning to see the stability returning, the OPEC chief noted.
Saudi Arabia’s Khalid al-Falih and Russia’s Alexander Novak—the energy ministers of the respective leaders of the OPEC and non-OPEC group of producers that are part of the deal, met this weekend in Moscow to discuss the state of the oil market, affirmed their readiness to react to changes in the oil market, and reiterated their plans to make the cooperation long-term, the Russian Energy Ministry said.
“Both Al-Falih and Novak reiterated their joint commitment to ensuring the adequacy of oil supplies, particularly in light of the uncertainties in the markets,” the Saudi Press Agency saidabout the meeting.
“The two Ministers reiterated their determination to continue working towards establishing a long-term cooperation framework between OPEC and non-OPEC producer countries to serve as a basis for proactively promoting market stability while serving the interests of producers, consumers and the global economy,” the Saudi statement said.
Earlier this month, OPEC’s Barkindo said that the world would hit the 100 million bpd level of consumption in the fourth quarter of 2018, “much sooner than projected.”
A week later, OPEC revised down its global oil demand growth estimate for this year and next, for a second consecutive month, pointing at a combination of factors that could slow down global economic growth—monetary tightening from central banks, weakening finances in some emerging and developing economies, rising trade tensions, and ongoing geopolitical concerns.
Very strong demand over the past year and a half-helped OPEC and friends a lot in their mission to bring the oil market back to balance. But now the headwinds for the global economy and oil demand have OPEC worried that a slackening demand could depress oil prices, hurt OPEC member oil incomes and economies again, and ruin the market stability.
But too much tailwind for oil prices due to reduced supply expected from Venezuela’s plunging production and returning U.S. sanctions on Iran, is not OPEC’s preferred solution either. Higher prices support rival oil production, most notably in the United States, and could hurt the emerging economies’ oil demand due to the combination of high oil prices and weakening emerging market currencies.
OPEC and allies’ response to these conflicting market forces is ‘stability’—tweak supply to keep oil prices high enough for oil producing nations’ revenues, but not too high to let demand be destroyed or rival supply to rise too much. OPEC and friends are now aiming at institutionalizing the ‘market stability’ efforts to continue to influence the oil market and prices for years to come.