As world oil glut continue to persist and exert pressure on crude oil prices, well through 2017-2018, oil producers within and outside OPEC are sending signals that they will possibly support a roll-over of Vienna accord that was unanimously decided and agreed last year.
Vienna accord is considered an important milestone in global oil market that was never witnessed before. The accord is an indication and recognition by all conventional oil producers that OPEC, alone is no more in a position to manage and global oil market.
Back in 1980’S OPEC failed to convince non-OPEC producers to support the envisioned production discipline and as such world oil prices went as low as $7 per barrel. In fact in the 1980’S OPEC cut its production ceiling from over 30 mb/d to less than 14 mb/d but non-OPEC producers raised their own production drastically and compensated OPEC members’ production cut.
In the meantime, some OPEC producers themselves raised production and exports in order to compensate for lower oil prices. However, under current OPEC and Non-OPEC production accord, a great deal of understanding and awareness led to record high production discipline amongst all conventional oil producers.
The new production pact came to effect since January 1, 2017 and OPEC has to test the market. There is no short-term solution for current relatively low oil price, Producers can not decide on short-term evidences and market behaviour. International oil price remained high for a considerable period of time and oil companies both national oil companies (NOC) and ICCs have all been engaged in extensive upstream and downstream investment program and major oil fields including Kashagan giant oil field in Kazakhstan where commercial oil production started in November 2016.
Moreover, and more importantly the consistently high oil prices over a long period of time led to over 4.5 mb/d oil production from non-conventional oil (and gas) in the United States. That means something like the birth of two Kuwait in less than three years and counting.
Having referred to shale oil and given the fact that in OPEC standards, shale oil is currently the second largest producers after Saudi Arabia, it seems imperative for OPEC/NOPEC engage into negotiation with US shale producers in order to share the burden of production cut for a certain period of time.
Another important phenomenon that put additional pressure on crude oil supply/demand balance is the spread of excess capacity and supply to refining sector. Refineries have currently encountered excess supply and capacity run that translate into less demand for crude oil. This has particularly exerted additional pressure on producers like Kuwait and Russia that also rely on refined products exports or have created refining capacity in consuming countries.
Another significant factor that has influenced market fundamentals on global scale is a reduced risk premium. During 1980’S, 1990’S and part of 2000, market was sensitive towards geopolitical risk factors. According to one study by OPEC Secretariat geopolitical risk factor, mainly from Middle East was somewhere between $5 to $11 per barrel.
When Saddam Hussein occupied Kuwait and consequently the US got involved with the situation the impact of risk factor was significantly high. Since mid-2000 when Middle East and North Africa was in turmoil, the risk premium was hardly calculated at $2.00-$2.50 per barrel. This is in part due global oil glut and excessive oil and product on the market.
As for the upcoming OPEC/NOPEC meeting where major producers and market players seem to be negotiating and content with a rollover of 2016 Vienna accord, market expects to continue with a price range of $50-$55/barrel for the rest of 2017 and 2018. For a higher price band of $65-$70 and still higher, market has bring shale oil producers on board and more drastic cuts is needed; though difficult but possible, because of the fact that OPEC is not alone in its quest for oil market stability.
Nevertheless, performance of Chinese economy for 2017-2019, President Trump’s energy policies and vision, Upcoming presidential election in Russia, Iran’s presidential election and fate of newly designed oil contract (IPC), deteriorating political situation in Venezuela are among parameters that can have impact on global oil market fundamentals.
Fereydoun Barkeshli is president of Vienna Energy Research Group in Austria and the National Iranian Oil Company’s former general manager for OPEC and international affairs.