Having helped wrestle the oil market from its latest bust, OPEC is now setting its sights at avoiding the next one.
While insisting that its work to drain oil inventories through output cuts remains far from done, the organization has in recent weeks shifted its rhetoric from that of a swing producer managing a supply glut to one trying to prevent a market squeeze.
Ministers have begun to increasingly stress to the market the need to invest in additional production capacity to meet robust growing demand in the years ahead — some $10 trillion needed through 2040 just to offset natural field declines, according to the UAE’s Suhail al-Mazrouei — with a tacit nod to the market’s significant geopolitical risk exposure, particularly in Venezuela.
OPEC’s current spare capacity is shrinking, as it maintains its production cuts and global consumption has risen, raising the risk of a price spike that it would like to avoid for fear of demand destruction.
“Building and holding ample spare capacity is needed to assure traders and investors that [the OPEC/non-OPEC coalition] has a buffer to offset unexpected tightness and geopolitical interruptions,” said Bob McNally, a veteran OPEC watcher with consultancy Rapidan Energy.
OPEC spare capacity stands at 3.24 million b/d, about 10% of the bloc’s December production, according to the International Energy Agency, which defines it as production that can be reached within 90 days and sustained “for an extended period.” The US Energy Information Administration estimates the bloc’s spare capacity far lower at 2.04 million b/d, defining it more narrowly as production that can be brought online within 30 days and sustained for 90 days.
The vast majority of that surplus capacity is in Saudi Arabia and its Gulf allies.
This may very well explain OPEC’s desire to make a permanent pact with Russia, the world’s largest crude producer, and other allies, beyond their 1.8 million b/d output cut agreement, which expires at the end of 2018.
An exit to the cuts with unfettered pumping would cause spare capacity to shrink even further, but a deal to continue market management in an alliance that would account for 45% of global crude production could help foster more upstream investment.
“If we extend our look to a couple of years, we have to worry about spare capacity [which is] declining as we go forward,” Saudi energy minister Khalid al-Falih told reporters in Riyadh last week. “I am worried about being able to meet the supplies of production we need from 2020 and beyond.” Mazrouei echoed that message, telling UAE newspaper The National last week that OPEC was encouraging its members to build “some buffers” in output capacity to protect against a demand surge or supply disruptions.
But convincing oil companies — whether state-owned or private — to spend capital to find more reserves and build more infrastructure only to keep production reined in for the sake of boosting OPEC’s spare capacity may be a hard sell. This is particularly true in a higher price environment, as the market may see as demand ramps up on expected global economic growth.
It may be left up to OPEC kingpin Saudi Arabia and Russia, who have steadily burnished their bilateral ties over the past year, jointly serving as the market’s swing producers, though Russia’s industry makeup of several independent and quasi-state oil companies may make a cohesive policy tougher to implement.
“We understand that global demand of oil will continue to grow rapidly and we’ll need to meet the demand, so we will likely need to work together, including on production technology and joint projects to meet this growing demand,” Russian energy minister Alexander Novak told S&P Global Platts in a recent interview.
THE VENEZUELA QUESTION
In the meantime, geopolitical risks lurk on global supply, with crisis-wracked Venezuela the most vulnerable.
Its production has fallen to 30-year lows, not counting a strike in late 2002 and early 2003, averaging 1.64 million b/d in January, according to the latest S&P Global Platts OPEC survey.
Many analysts expect further declines of perhaps 600,000 b/d or even more, as Venezuela grapples with onerous debt, runaway inflation, deteriorating equipment and labor shortages.
Elsewhere in OPEC, production in Libya and Nigeria remains vulnerable to civil unrest and sabotage. Iran is also facing the prospect of the US snapping back sanctions that were waived under the nuclear deal, which could impact some 500,000 b/d of output, according to Boston Consulting Group, which estimates OPEC spare capacity at 2.1 million b/d.
OPEC officials have so far steered clear of highlighting Venezuela’s problems or addressing whether other countries would step up production to replace any lost Venezuelan barrels.
The crisis in Venezuela “is not an excuse for other producers to increase their output,” one OPEC official told Platts on condition of anonymity. “We look at the overall [compliance] level, but everyone is responsible for their own levels.” Jamie Webster, senior director of Boston Consulting Group’s Center for Energy Impact, said OPEC will probably wait to see how US shale output grows before deciding to do anything about Venezuela’s supply decay.
“Any action to offset declining Venezuelan production would likely not occur until well after it was clear that the market was clearly under-supplied because of it,” he said.
Source: PlattsPrevious Next
2018 is Likely To Be The Best Growth Year Since 2011:Mr Vishavdeep Gautam, C O O , WOMAR Logistics
India Tanker Shipping Trade Summit 2018