Opec deal looks to maintain oil’s sweet spot - QNB
Gulf Times reported that the Opec deal recently has looked to maintain oil’s sweet spot, QNB said and noted “downside risks still dominate” on a longer-term horizon. Opec and Russia (Opec+) wound up their meetings last week by agreeing on a production increase for the first time in nearly two years. While details remain cloudy with no formal output targets provided, a supply increase of up to a 1mn barrels per day (bpd) over the next six months looks likely.
Partly reflecting the agreement’s lack of precision, spot oil prices have been volatile in the aftermath. The key Brent benchmark initially surged around 4% before falling back close to the $75 level seen before the meetings.
The background to the decision to lift production is, of course, Opec’s agreement to reduce and then freeze its output by 1.2mn bpd from October 2016 levels with several non-Opec members (primarily Russia) weighing in with a further 600,000 bpd of cuts. These reductions, QNB said were spurred by the cocktail of then sluggish global demand and surging US shale supply which was leaving to a supply glut, surging inventories and benchmark prices tumbling below USD 40/b.
Fast forward 18 months and the output cuts, which were extended to mid-2018, have helped restore balance to the oil market. OECD inventories have pulled back towards longer-run norms and spot prices are back above $70/b, QNB noted.
In fact, with Brent crude recently briefly touching $80/b, prices are in danger hitting levels that could crimp global demand and spur a global capex wave that could reignite severe downside risks over the longer haul. The desire to keep oil prices relatively stable around current levels, which are close to a sweet spot, therefore underpins Opec’s decision to relax its output curbs.
But while the ‘Opec+’ deal has certainly played a role in returning the oil market to health, it has not been decisive. Over the period of the deal, US oil output has continued to surge.
QNB said that in fact since October 2016, US supply has surged by almost 1.7mn bpd to over 10.4mn bpd; a close to 20% increase.
The US’s supply surge would have completely nullified the impact of the ‘Opec +’ deal had the cuts in reality not been substantially deeper than intended. Rather than the combined 1.8mn bpd agreed reduction, the group’s output has actually fallen by over 2.3mn bpd vs. October 2016.
The key driver of ‘over-compliance’ has been the collapse of Venezuelan output, which has slumped by some 700,000 bpd; more than 600,000 bpd than its agreed commitment! Even with the unprecedented slump in Venezuelan output and Opec’s resulting ‘over-compliance’, supply factors have not been decisive in the oil market’s recovery. Key has been booming global demand.
With global GDP growth approaching a 7-year high of close to 4% this year, global oil demand is gaining at an annual rate of around 1.4mn bpd.
Opec and Russia’s willingness to increase production would seem to reflect confidence that at least two of these three key factors: buoyant global oil demand and further short-run supply disruptions will remain in place.
It said that Venezuelan output could easily fall further, risking a spike in spot prices north of USD 80/b unless other Opec members pump more. In its recent 2019 forecast, the authoritative International Energy Agency (IEA) warned that Venezuelan output could still plunge by a further 550,000 bpd.
The other potential supply disruption facing Opec is the risk of renewed US sanctions removing Iranian barrels from the market. The IEA also estimates that Iranian output could be curbed as much as 900,000 bpd based on the impact of previous sanctions.
While the IEA’s estimates should probably be treated as a worst-case scenarios, the spectre of Venezuela and Iran supply disruptions looks to have been key to Opec’s decision to try to lift aggregate production back to agreed levels and heading off the risk of even greater ‘over-compliance’.
While short-run supply dynamics are a clear upside risk, demand prospects are becoming more uncertain. While booming US GDP growth shows little sign of slowing for now, eurozone growth momentum has palpably cooled off in recent months.
China too is showing clear signs of slowdown with recent retail sales and industrial data disappointing. And the rising threat of a global trade war increases downside risks to the world economy in 2019.
Source : Gulf Times