OPEC puts off tackling the big issues

The meeting of the Joint Ministerial Monitoring Committee — in charge of monitoring the current output cuts agreement between OPEC and their non-OPEC allies — on Sept. 23 was an easy one, contrary to what had been expected.

The JMMC took a decision to keep things as they were, leaving many issues pending. The issue of how to lower the compliance rate of the alliance to 100 percent, for example, was not resolved. Without discussing a new mechanism to assign individual quotas for the 24 countries who are part of the agreement that expires on Dec. 31, there is little hope that compliance will come down from its current level of 129 percent.

Why was the meeting so smooth? First, the two elephants in the room didn’t want the JMMC’s mandate to change and to conflict with the bigger body, the Ministerial conference of OPEC.

Second, as this agreement is ending, the existence of the JMMC might end as well — since its main role was to monitor the implementation of the agreement. Therefore, in order to convince the Ministerial conference to keep this body, they must show that JMMC is not a threat to its responsibility and predominance.

Third, it was obvious that not all those with the extra barrels (Iraq and Nigeria) were represented ministerially at the meeting.

Last but not least, Algeria was celebrating the 2nd anniversary of the accord that created this alliance of global producers that is known as OPEC+. Ministers in Algeria did not want to ruin that celebration with a heated meeting.

So the gathering ended and the focus of the JMMC was shifted to address the risks and challenges of next year.

One of the main challenges of next year is the tightness of the oil market, which will be addressed again in the next meeting of the JMMC in Abu Dhabi on Nov. 11 and the ministerial conference on Dec. 6.

As of today, it seems the market will remain tight for at least the first half of 2019. The oil market is tightening fast as oil demand will hit 100 million bpd for the first time in the fourth quarter of this year.

There are two reasons for that. OPEC’s spare capacity and the supply crunch outside OPEC.

As demand grows, only a few countries can meet it at the moment. The supply picture isn’t rosy due to a fall in production in Latin America; a ban on Iranian shipments by the US; a fragile situation in countries such as Libya; and finally, an infrastructure bottleneck in the Permian, America’s largest basin for shale oil.

OPEC does not have a huge amount of spare capacity. The International Energy Agency (IEA) puts that at 2.7 million bpd, 60 percent of which is in Saudi Arabia. That is a larger buffer than some other analysts believe, although the IEA notes that that does not mean that all the 2.7 million bpd is available at short notice. Saudi energy minister Khalid Al-Falih told reporters in Algeria that Saudi Arabia’s spare capacity stands now at 1.5 million barrels per day (bpd).

The unavailability of enough spare capacity is one of the reasons (not the only the reason) why OPEC+ hasn’t been able to bring the compliance rate to 100 percent.

The alliance of 24 countries had agreed in June to boost production to bring down the total volume of cuts to 1.8 million barrels per day (bpd). OPEC+ was cutting production by more than 1.8 million bpd as many countries were cutting involuntarily due to natural or forced declines in output.

The alliance is now overcutting by 520,000 bpd above the agreed level. So why is OPEC not tapping its 2.7 million bpd spare capacity to bring that to 100 percent?

In addition to limited spare capacity, there is the issue of demand. OPEC countries cannot produce more oil without getting requests from customers. There is no dumping of crude into the market.

Another reason why the compliance rate is still at 129 percent is the involuntarily falls in output from non-OPEC countries such as Mexico and Kazakhstan.

Russia is already taking steps to address the imbalance in the market but it is also nearing its full output potential. According to recent media reports, it is pumping crude this month at record levels. It may release up to 11.3 million bpd to the market this month and next month.

The supply situation in OPEC+ when combined with the crunch elsewhere leads to the conclusion that things will be difficult, and that is factored into oil prices, with Brent already trading above $80.

Until these issues are resolved, oil prices will trade higher and they may hit $90 by end of the year.

Putting all this aside for now and focusing on 2019 is not making the market feel comfortable. If the alliance is not able to resolve its short-term problems quickly, then its ability to address 2019 and other long-term challenges is limited.

But the meeting in Algeria was positive (maybe not for the market) as it showed that OPEC+ is sailing in calm waters for now. All issues have been postponed until a later date.

The other positive announcement in Algeria was the intention to complete the long-term framework for OPEC+ (which is still a work in progress) by end of 2018.

In the end, the Algeria meeting is over now and the market is looking forward to seeing what will happen in Abu Dhabi and Vienna, as these two meetings will take place after the US will implement in full its ban on sales of Iranian oil to its allies. So more heated meetings await and 2018 will remain a crucial year for the market. 

From:Arabnews