Chineme Okafor writes on the latest move by oil producers on the Organisation of Petroleum Exporting Countries (OPEC) platform to calm activities pushing the global oil market to conditions they consider threats to their interests

Member countries of OPEC stood up to defend their interests two years ago when the global oil market reportedly went into a precarious position.

At that time, oil supply was said to have heavily outpaced demand between 2014 and 2016, and inventories on the back of this expanded rapidly. Commercial inventories of 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.

It was thus clear from this that there was a huge excess of oil supply, which naturally had an impact on prices and economies of producers like Nigeria.

To revive the market, OPEC started out negotiating ways to curb the inventories and this ultimately led them to engage with 10 non-OPEC oil producing countries led by the Russian Federation to act, and under an umbrella of the ‘Declaration of Cooperation’ (DoC), which was signed in December 2016, they voluntary decided to adjust their production levels to cut back the oil stock overhang, and re-balance the interplay of supply and demand.

Since then, the DoC has according to the OPEC impacted the oil market, and helped bring down total OECD commercial stocks in absolute terms by 213mb since January 2017.

Also, prices were restored to comfortable levels, until recently when they reportedly plunged by 30 per cent on account of a broader market sell-off and growing consensus that supply will outstrip demand in 2019.

Based on the potential impacts of this, OPEC and its non-OPEC allies saw the December 6 and 7, 2018 meeting in Vienna as another opportunity to find ways to either stick together in the spirit of their 2016 DoC or bear the consequences of any unworthy development from the market heading into 2019.

Taking Charge

Based on conversations and notes exchanged with THISDAY, market experts and analysts were of the view that OPEC and its allies may have to cut their production levels to restore stability in the global oil market and prices.

Thus, analysts felt 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 – which looked likely, at the 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 would be necessary to ensure that the growing oil inventories in the market are kept at levels that are comfortable and not distortional.

Al-Falih, who took charge of consulting with key players within the cartel and allies, 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. Both ministers briefed journalists on their conversations in this regards.

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 in Vienna, Austria, 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.

Emerging Threat

Starting out at its meeting, OPEC stated it was likely going to adopt new strategies in their renewed push to ensure that prices of oil in the global oil market does not slide back to the low levels they were in 2015, and which necessitated the DoC that put out 1.2mbd.

President of the OPEC Conference, and Minister of Energy and Industry of the United Arab Emirates, Suhail Mohamed Al Mazrouei, stated at the opening of the 175th General Meeting of the OPEC Conference that heading into 2019, the group recognised new threats to its 2016 DoC, and that, “this will require us to change the strategy we took in June 2018.”

As at the time of filing this report, OPEC had not disclosed the nature of the new strategy it would take, and was still meeting with non-OPEC members. Analysts however posit that a deal would be reached notwithstanding.

In his opening remarks, Al Mazrouei, explained the 2016 DoC had been hugely successful, but there was a consensus amongst the group that prospects point to higher oil supply growth than expected global requirements.

He said these were signs of a potential slowdown in oil demand, which the group had to carefully watch to ensure it did not disrupt the DoC.

“In looking back on 2018, I think we can all say it has been a positive year. We have witnessed positive progress on removing the inventory overhang, the market has seen further re-balancing and there has been excellent collaboration between OPEC and non-OPEC participants in the ‘Declaration of Cooperation’.

“I would like to acknowledge and commend the achievements of OPEC member countries, as well as participating non-OPEC producers in the ‘Declaration’, for their continuous efforts over the past two years to pursue a balanced, stable and sustainable global oil market. This serves the interests of consumers, producers, the industry and the global economy at large,” said Al Mazrouei.

He further stated: “However, I think we can all recognise that our work is not done. As we look forward to 2019, we see a new set of challenges. This includes the general consensus that prospects point to higher supply growth than expected global requirements and there are signs of a potential slowdown in demand.”

“Today, it is vital that we thoroughly examine the potential gap between supply and demand in 2019, and how this might impact inventory levels and the extremely ‘hard won’ market balance we have achieved over the past two years,” he added.

Expressing confidence that parties to the DoC will stand by it, Al Mazrouei, explained: “We need to focus our joint efforts on maintaining the balanced market we achieved in 2018; sustaining the stability we all desire; and, ensuring that there is a firm foundation to allow the industry to make the necessary investments to continue to meet expected future oil demand.”

He noted in this regard, “We need to remind ourselves of the importance of a cooperative, agile, and forward-looking OPEC, and fully appreciate the value of the joint efforts with our non-OPEC friends through the historic ‘Declaration of Cooperation’.

“Experience has repeatedly shown us that the enduring principle of cooperation and the bravery to try something new, such as the ‘Declaration’, can bring about great success.”

Production Level

Though expected to participate in whatever decision OPEC takes, Kachikwu told journalists on the first day of the meeting that as hard as it would come for Nigeria, she will make efforts to cut back her output if OPEC decides to.

Unwilling to state how much oil Nigeria will cut, Kachikwu said: “Very difficult to do that, where we are now is that everybody must be seen to contribute. The smaller it is the more amenable we are to participate, the larger it is the more difficult it will be to participate.”

He further explained to Bloomberg, “I am keeping all fingers crossed, we’ve gotten exemptions three times understandably, this time around, I think there is a decision that everybody must be seen to chip in. We don’t know the numbers yet but let’s get in there first, I know it is going to be very little.”

Shortly after the OPEC meeting where no decision was announced yet, Kachikwu said he was confident a deal would be reached but added that the position of non-OPEC countries led by the Russian Federation was relevant to whatever will be achieved after all.

He however told THISDAY that, “Given what has happened today, I think we are fairly close to getting a deal within OPEC, however, we will still leave it up to non-OPEC. It depends on what happens in non-OPEC.

According to him: “Still preliminary, we will like to see how it moves. What we have are some level of proposals on the table right now. Tomorrow, we have a meeting with non-OPEC, some level of meeting with OPEC members and by then we will know for certain where we stand on this issue.”

The minister refused to disclose what number Nigeria has agreed to cut its oil production to accommodate the demands by OPEC and non-OPEC, but was quick to state that Nigeria had remained a committed and cooperative member of OPEC.

United Group

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

According to CNBC, Russia’s energy minister, Alexander Novak, returned on Friday to Vienna after discussing with Russian President, Vladimir Putin in Moscow.

Novak, was reported to have said Russia would seek an agreement with OPEC and non-OPEC producers. Also indications emerged Russia could contribute a cut of around 200,000 barrels per day (bpd) to the deal even though OPEC delegates have been pushing for it to cut around 250,000bpd.

Further, analysts said a big cut would be needed to reverse recent price falls and that Russia’s volume would be key to this.

“Reversing the overwhelmingly bearish price sentiment will likely require a credible and cohesive message from the OPEC meeting,” said U.S. investment bank, Jefferies, to CNBC.

Jefferies added that, “Even a 1 million bpd cut could lead to a ‘sell the news’ reaction in the short term. If no agreement is reached, oil prices have significant downside.”

Sealed Deal

After two days of touchy negotiations, OPEC and their non-OPEC allies finally broke a deadlock over production limits talks and collectively agreed to cut their outputs by 1.2 million barrels of oil per day (mbd).

Agreeing with its partners to remove 1.2mbd from the market, OPEC countries decided to take up the burden of limiting their production by 800,000 barrels per day (bd), out of which Kachikwu, told THISDAY that Nigeria could contribute up to 40,000bd to, representing about 2.5 per cent of her 1.7mbd current production level.

Kachikwu explained that the output cut was as a matter of fact in the best interest of Nigeria, adding that with larger oil volumes in the market weakening prices, Nigeria would have found it difficult to implement its budget for 2019.

However, some details of the agreement as stated by Mazrouei, and Novak, at a press conference after their joint meeting showed that as OPEC countries take out 800,000bd from the market, non-OPEC members would have to take out the balance of 400,000 with Russia contributing as much as 230,000bd of this.

Also, Iran; Venezuela; and Libya were granted exemptions from the cuts because they’ve either suffered sanctions or production disruptions, and would not be able to participate in the cut.

Mazrouei, in his remarks at the briefing stated that the parties took note of oil market developments since it last met in Vienna in June 2018, and reviewed the outlook for the year remainder of 2018 and 2019.

“In view of the current fundamentals and the consensus view of a growing imbalance in 2019, the conference decided to adjust OPEC overall production by 0.8mbd from October 2018 levels, effective as of January 2019, for an initial period of six months, with a review in April 2019,” said Mazrouei.

He further stated that the Joint Ministerial Monitoring Committee (JMMC) of the parties will monitor timely and fair implementation of the production cuts resolution and report back on a regular basis.

According to him, agreeing to this decision, member countries confirmed their continued focus on fundamentals for a stable and balanced oil market, in the interests of producers, consumers, and health and sustainability of the petroleum industry.

“Member Countries remain committed to being dependable and reliable suppliers of crude and products to global markets. The Conference thanked all OPEC member countries, as well as non-OPEC countries participating in the ‘Declaration of Cooperation’ for their continued commitment to achieving and sustaining balance and stability in the market,” he added.

He reiterated that the deal was a strong signal to anyone doubting the cooperation of the group, and that they can overcome whatever challenge thrown at them.