Saturday , October 23 2021

OPEC + Deal is not enough to save the oil market


If the goal of the OPEC + cuts was to raise oil prices, then the agreement is clearly failing.

OPEC + is struggling to find a way to rescue oil prices from another deep crisis. The WTI is now in the range of $ 40 and Brent in the mid-50's, both with a 15-month low. US shale continues to rise, even if the shale producers themselves are facing financial problems at such low prices. Oil traders are clearly skeptical about OPEC + being willing or able to balance the oil market.

OPEC + thought they got a strong agreement in Vienna in early December, but more needs to be done, it seems. OPEC Secretary-General Mohammad Barkindo wrote a letter to the cartel members, arguing that they need to increase the cuts. Initially, the OPEC + coalition suggested that producers should cut production by 2.5 percent, but Barkindo said the cuts need to be more than 3 percent to achieve the overall reduction of 1.2 million barrels per day.

More importantly, the group needs to detail how much each country should produce. "In the interest of openness and transparency, and to support market sentiment and confidence, it is vital to make these production adjustments publicly available," Barkindo told members of the letter, according to Reuters. By specifying exactly how much each country will reduce, thought seems to be, it will go a long way in relieving market anxiety about the seriousness of the group.

Still, the drop in oil prices this month is evidence that traders are not convinced. The view is that "the US will continue to grow as gangsters, regardless of price, and will overburden any OPEC stock," Heli Croft, the commodities strategist at Canadian brokerage RBC, told The Wall Street Journal. "Unless there is a real geopolitical explosion, it may take some time for these cuts to actually change the sentiment." Related: Hike Rate interest rate hits hard oil

Although cuts from producers like Saudi Arabia help supply the market, OPEC can help erase the surplus in another unplanned fashion. Bloomberg raises the possibility that low oil prices could increase the turmoil in some OPEC member countries. The price collapse between 2014 and 2016 provoked, or at least exacerbated, strikes in Libya, Venezuela and Nigeria. The same could happen again.

Almost all OPEC members need much higher oil prices to balance their books. Saudi Arabia needs about $ 88 per barrel for its balanced budget. Libya needs $ 114. Nigeria needs $ 127. Venezuela needs $ 216. Only Kuwait – at $ 48 a barrel – can balance its books at current prices. Brent is trading in the mid 50's now.

This raises the prospect of more restlessness. Venezuela's supply losses are guaranteed – and largely already taken into account in market forecasts – although the rate of decline remains uncertain. But other unexpected interruptions are possible and become more likely with lower prices. Libya and Nigeria are the most likely sources of instability. Unexpected supply disruptions in 2019 could tighten the market.

Still, while there are many problems facing OPEC +, as it seeks to balance the market, an important factor is largely outside the control of the group. Much of the OPEC + discussion focuses on supply-side dynamics – how much the group should be producing to achieve some price target. But the problems that are sweeping the oil market now may be even greater.

Specifically, a global economic slowdown could translate into much slower demand, a problem that OPEC + can not fix. Sinking oil prices is not just a matter of market expectation of oversold supply of US shale.

Financial turmoil and economic slowdown are clearly outpacing OPEC + cuts as well as the jawboning that some OPEC officials tried last week. Stock markets tumbled in the last few days after the Federal Reserve cut interest rates again and signaled two more interest increases in 2019.

There has yet to be any dramatic review of the 2019 oil demand from leading energy analysts such as the EIA or the IEA. But again, financial instability and the sour oil market have only recently emerged. The IEA has maintained a growth rate of 1.4 mb / d for demand next year, but it does so with a grain of salt. Demand revisions may be future. OPEC + may have to maintain its supply restrictions for the full year in 2019, but it is unclear if even this could push prices back to where they were two months ago.

By Nick Cunningham,

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