Oil producers must choose between prices and stability
The oil market has had an impressive run since the beginning of the year. But as we get closer to the midpoint of 2018, it is difficult to know if the current run will continue.
The oversupply that has persisted in the market for more than three years, where oil stored for commercial use far exceeded world needs. has been eradicated, thanks to the unprecedented agreement between 24 OPEC and non-OPEC producers at the end of 2016.
The agreement to reduce production by 1.8 million barrels per day (bpd) from January 2017 It has drastically reduced supplies, boosting prices. Last week, Brent crude rose to more than $ 80 per barrel for the first time since the end of 2014.
The elimination of oversupply raises the question of what to do if the market goes into a deficit.
The International Energy Agency (IEA) Last week said that the OECD trade shares fell against seasonal by 26.8 million barrels in March to 2,819 million barrels, its lowest level in three years.
Stocks are now one million barrels below the five-year average, the IEA said. But the production reduction agreement is valid until the end of the year. With producers cutting production more than previously agreed, the supply situation is becoming increasingly narrow.
What will OPEC do to address this? Nothing seems, yet. The 24 parties to the agreement will meet next month in Vienna to review the agreement. Many countries have already committed to do whatever it takes to keep the market balanced; But that may not happen, with producers perhaps opting to keep the market adjusted for the rest of the year.
"The elimination of oversupply raises the question of what to do if the market goes into a deficit."
There are three main reasons for this. First, many countries have suffered financially in the last three years. Tighter supplies and higher prices provide a golden opportunity to recover some of those losses. Second, the market is tight due to some involuntary cuts, as well as overly enthusiastic reductions by other producers. Third, some supply disruptions are beyond the control of producers, related to geopolitical factors such as sanctions on Iranian crude and possible restrictions on Venezuelan oil.
OPEC and its allies have always said that reducing stocks to their five-year average was the main objective of the agreement. Now it seems as if some members have had a change of mind, shifting their attention to investments in the industry.
In fact, the issue of recovering investments is not a short-term one and it should be seen outside the current agreement of cuts. The restoration of investments may be a perfectly reasonable reason to maintain cooperation between producers after the agreement expires at the end of the year, but it is not an issue on which the current agreement can be focused since it was designed to address the excess offer, not the deficit.
Any change in the approach will not be well received by oil consumers, who will be forced to guess what the true motives of the producers are: rebalancing and market stability or higher oil prices? The only thing that consumers know with certainty is that the rising oil prices are not good for them.
The main consumers have begun to feel anxieties, and India and South Korea complain that prices exceed $ 80. In recent days, Saudi Energy Minister Khalid Al-Falih spoke with officials from both countries on the matter.
It is natural for consumers to feel worried, with prices likely to rise beyond their previous $ 50-70 comfort zone. Producers, in turn, will argue that customers enjoyed low oil prices for a long time – with Brent crude falling below $ 30 per barrel at the beginning of 2016 – and that it is time for them to accept what the market.
Before In a month-long meeting, producers should think about what the agreement's objectives should be: keep the market balanced or keep prices at acceptable levels for consumers and producers.
The issue of demand is increasingly urgent, since this year the rebalancing of the market has been based on a greater demand to absorb excess supply. The IEA warned last week that if prices rise too much, demand could fall in the second half of 2018.
Will producers take that warning seriously? This is what everyone will look for when they meet in Vienna on June 23.
• Wael Mahdi is an OPEC energy journalist and co-author of "OPEC in a shale oil world: where to go"? "Twitter @waelmahdi
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