Joining Forces for Oil Market Stability

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Ahead of their meeting to deliberate on developments in the global oil market in Vienna this week, Nigeria and its allies in the Organisation of Petroleum Exporting Countries as well as non-OPEC members led by the Russian Federation, may be looking to sustain the unity they built in 2016, to amongst other things, keep oil prices stable, writes Chineme Okafor.

Two years ago, the global oil market was in a precarious position. Oil supply had then heavily outpaced demand between and global oil inventories on the back of this, expanded rapidly such that the commercial inventories of the Organisation for Economic Cooperation and Development (OECD) countries which is usually a key indicator of the health of the oil market reached a record high of more than 400 million barrels (mb) in July 2016.

From this, it was clear there was excess oil supply which naturally had an impact on prices and producers.
To revive the market, OPEC and 10 non-OPEC oil producing countries decided to act, and under an umbrella of the ‘Declaration of Cooperation’ (DoC) which was signed in December 2016, undertook voluntary productions adjustments to cut back the oil stock overhang, and rebalance the interplay of oil supply and demand.

Since then, the DoC has according to the OPEC had a transformative impact on the oil market, and has since helped bring down total OECD commercial stocks in absolute terms by 213mb since January 2017. This also helped in restoring prices to comfortable levels until recently when oil prices plunged by 30 per cent on account of a broader market sell-off and growing consensus that supply would once more outstrip demand in 2019.

This thus presented itself as a major point of conversation at the December 6, 2018 meeting in Vienna of member countries of the OPEC and their allies led by the Russian Federation, which analysts suggested they would either have to stick together to keep the market stable or deal with the consequences of any unworthy development from the meeting.

Ahead of the Meeting
Industry experts are of the view that the cartel and its allies may have to cut their production levels to restore stability in the global oil market and prices.
The analysts feel anything less than that could mean a low oil price in 2019 based on ample supply; rising stocks; and slumping refining margins.

According to them, if OPEC and allies agree to cut production at their next meeting, then, they would have effectively overlooked recent calls by US President, Donald Trump to them to bring down oil prices which traded on an average of $60.61 per barrel for Brent in early December from an average of $76.73 per barrel that it traded for in October.

In its oil market report for November, the International Energy Agency (IEA) explained that since the middle of the year, oil supply had increased sharply, with outputs from the Middle East; Russia; and the United States making up output falls from Iran, Venezuela and elsewhere.

Additionally, the IEA explained that new data it gathered showed that the pace of oil production has accelerated, and the higher output, in combination with Iranian sanctions waivers issued by the US and steady demand growth, suggests there was a 0.7 million barrel a day (mbd) stock build in the fourth quarter of 2018.

Also, the IEA report stated that stock levels of OECD countries have for four months in a row increased.
But the cartel, according to the Energy Minister of Saudi Arabia, Khalid Al-Falih, would do what is necessary to ensure that the growing oil inventories in the market are kept at levels that are comfortable and would not distort it.

Al-Falih, was a guest to the Nigerian Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, recently in Abuja, where they both talked extensively on the need to continue to work together to stabilise the oil market.

The Saudi minister however said the cartel had taken note of the instability that was growing in the market, adding that this has been amplified by geopolitical tensions and speculative activities by financial investors.

According to him, when producers gather this week, they will, “do the right thing in stabilising the market and giving producers and consumers comfort,” in such a manner as to ensure that the oil market is stable in 2019.

Responding to inquiries on his thoughts about Trump’s nudging of the cartel not to consider production cuts and to keep prices of oil low, Al-Falih, said: “I think I speak for the 25 countries altogether. We saw in the action we decided to take in 2016, great benefits for the entire global producers and consumers because oil market stability is very instrumental essentially to everyone in the market, and we do that by focusing on primarily one parameter which is global inventories.

“We try to be as objective and data-focused as possible, looking only to inventories, whether they are building to levels that will destabilise the market, (and) shutdown investments.
“As we meet in a week time, our focus will once again be on fundamentals of supplies and demand, and inventories and try to bring that back into level that will assure the market.

“The decision is going to be made essentially on December 7 on what to do, and as I said in Abu Dhabi, we have to do whatever is necessary. As important as Saudi Arabia is, we cannot do it alone, we will not do it alone.”
Buttressing the commitment of the cartel and its allies to a balanced market for all parties, Al-Falih, noted that whatever decision that will be made at the meeting, would be in the interest of American oil producers whom he said were equally worried about the growing instability in the market.

Similarly, Kachikwu, who aligned with most of Al-Falih’s thoughts on what direction the market should go in this regard, stated that both countries were committed to seeing the market rebalance to comforting levels.

Not willing to state how much oil may be cut by OPEC and its allies in this regards, Al-Falih, said: “Everybody is longing for reaching a decision that will bring stability back to the market, and what that will be is premature to say, but I think people know that instability in the market will not help. We will see the numbers from the technical advisers.”

Similarly, for Nigeria, Kachikwu, who did not commit to state categorically if Nigeria would be involved in the production cut and at what volumes, explained that it would be too early for Nigeria to decide on seeking production cut exemptions, but added that the country would commit to whatever decisions the cartel take.

The minister was however quick to state that Nigeria had remained a committed and cooperative member of the cartel, and was obedient to the group when it got an exemption which subsequently asked it not to exceed certain output levels.

“There is an absolute resolve from both countries to ensure that as we get to Vienna, whatever action that needs to be taken to stabilise price will be taken. The interest of the whole will guide us in our decision. We are looking forward to Vienna, but not without some trepidation.

“It is too early (to determine an exemption), but I will say that Nigeria is very committed to working with OPEC, we’ve always been committed even when we have production cap exemptions. When we get to OPEC, we will make a decision in supporting OPEC,” Kachikwu stated.

OPEC, a United Group
Going into the meeting, analysts further told THISDAY the group was still united in its purpose, which was why Al-Falih visited Kachikwu to perhaps get his support for a production cut at the OPEC meeting.

Accordingly, Kachikwu played a key role in getting all parties on board for the production cuts that happened in 2016, and Al-Falih, probably would like him to play the same role this time around by leading the lobbying against all the possible holdouts including Iran.

But, this according to the analysts could all depend on the kind of agreement President Vladimir Putin of Russia and Saudi crown prince, Mohammed bin Salman bin Abdulaziz Al Saud, reach at the meeting of the G-20 in Argentina.

OPEC, the analysts opined is still a united group, and will reach consensus either way.
“If they don’t agree to an immediate cut, it might only be delayed till next year. Mohammed bin Salman bin Abdulaziz Al Saud or MBS needs to keep Trump happy so that is another angle that is also in the mix.

“OPEC will be happy to see prices between $70-80 per barre, and Nigeria, in this case, has very little choice because in reality, we don’t really matter in the grand scheme of things. But Kachikwu was very important in getting consensus on the first deal. So, that’s why Al-Falih is reaching out to him again.

“If a decision is made to cut output, it will be his (Kachikwu’s) job to get everyone else on board. That’s my view of why Al-Falih came to Abuja,” said one of the analysts in a confidential note shared with THISDAY.