For an entire trading session last week (Thursday, December 6), it seemed there would be no deal between the oil cartel OPEC, which counts Saudi Arabia among its biggest beasts, and 10 non-OPEC producers fronted by Russia, to cut production, in their bid to support crude prices.
In a near-unprecedented move, when the 175th OPEC ministers’ summit ended that evening, a final communiqué was not issued, and there was no media and analysts briefing. It seems Saudi Arabia –itself responsible for pumping close to 11 million plus barrels per day (bpd) – wanted other OPEC and non-OPEC members to shoulder the collective responsibility of production cuts, rather than leaving it to take bulk of the action.
But the after worst possible start, with Qatar announcing it was leaving OPEC thereby making it the first Middle Eastern member to do so, neither Iran nor Russia seemed all that keen on cutting output.
However, non-action perhaps was not an option. Merely a fortnight ago, ten trading sessions to November 23 had registered three intraday declines of over 7%, making the Brent front-month contract’s 2018 peak of $84.09 per barrel (seen in October) seem like an eternity ago.
So less than 24 hours after the conclusion of the communiqué-less OPEC ministers’ summit, both OPEC and non-OPEC participants emerged to announce a 1.2 million bpd cut, with the former shouldering 800,000 bpd and the latter 400,000 bpd of the proposed cuts. The Iranians, likely to feel a further squeeze from US sanctions, got the “exemption” within OPEC that they were asking for.
With the oil market bracing for a possible “no deal” scenario or a somewhat predictable 1 million bpd cut, the additional 200,000 bpd provided the trigger for a relief rally of nearly 5% at one point on Friday (7 December). As Libya, Nigeria’s production is still rocky; Venezuela is close to a disaster; and Iran looking at a reduction of 300,000 bpd over the coming quarter, on paper the cut could be as high as 1.5 million bpd.
Yet, in a volatile time like the one we are in, perhaps both OPEC and the bulls, if we can call those betting on a $70 price floor that, are perhaps missing one crucial point – oil price is not just a story of supply, it is also a story of demand.
Time and again this fallacy of focusing on one and not the other is committed. In September, when talk of U.S. President Donald Trump’s sanctions squeeze on Tehran was all the rage, without waiting for what shipping data was suggesting or the fact that the White House might grant some allies exemptions on Iranian crude imports (as it did), talk of $100 oil prices became all the rage.
That too at a time of great uncertainty in Europe, tepid demand in emerging economies excepting India, growing fears of global trade wars, and industry forecasters – including OPEC – predicting a demand growth of not more than 1.4 million bpd; a figure that’s hardly going to set pulses racing.
Of course, now that daft bullish forecasts of $100 have fallen flat, equally daft bearish ones of $40 oil have started surfacing which won’t ring true either, largely thanks to OPEC. That said, the cartel won’t admit it, but it probably wants the short-term floor to be at $70.
That’s problematic too if an optimistic 1.4 million bpd demand growth forecast is what it is based on. It cannot be ignored that Eurozone growth continues to disappoint, global trade is decelerating and China’s slowdown is a visible fact, and not just a forecast. We haven’t even mentioned the words “trade wars” and a prospect of further U.S. interest rate hikes.
Given that backdrop, Brian Coulton, Chief Economist at Fitch Ratings, says the agency’s base case remains a soft landing for global growth in 2020 as US fiscal support fades. “The slowdown we have been expecting for a while is now materializing. Our global growth forecasts are unchanged for this year and next, with growth peaking in 2018 at 3.3% before moderating to 3.1% in 2019 and then falling below 3% in 2020.”
It suggests demand for oil will take a hit at a time when U.S. production continues rise, with shale output rising at the same pace we witnessed in the second quarter of 2014. If anything OPEC’s move provides U.S. drillers with a further incentive to pump more, and they already are, having made America the world’s largest producer of crude oil.
Based on industry projections, the U.S. could hit 12.4 million bpd in production by this time next year. This raises the prospect of loss of OPEC’s market share in a market that’s not firing on all cylinders in any case, and whether some in OPEC or even the Russians for that matter, can hold their nerve. As things stand, a sustainable $70 oil price doesn’t look certain at all for 2019.