OPEC holds firm despite growing market anxiety

Washington realistically expects Tehran’s exports to be cut 30-50%.
Sunday 30/09/2018
Saudi Energy Minister Khalid al-Falih at the inaugural session ceremony of the OPEC Ministerial Monitoring Committee in Algiers, on September 23. (Reuters)
Fears of extra supply. Saudi Energy Minister Khalid al-Falih at the inaugural session ceremony of the OPEC Ministerial Monitoring Committee in Algiers, on September 23. (Reuters)

Concern about the impending loss of Iranian oil and the perception that major producers cannot — or will not — adequately fill the ensuing gap in the market sent crude prices to nearly 4-year highs as US President Donald Trump has again publicly taken OPEC to task for not reining in prices.

OPEC’s de facto leader, Saudi Arabia, pushed back at Trump’s rhetoric: Riyadh said it would only boost production as it sees fit, citing a relatively balanced global supply and demand market.

Oil prices jumped nearly 2% following a September 23 meeting of OPEC and independent producers in Algiers that resulted in no announcement about increasing output beyond what the two dozen members of the cartel agreed to in June, when OPEC and its non-member allies said they would increase oil production by up to 1 million barrels per day (bpd).

Ahead of the Algeria gathering, Trump repeated a familiar refrain, tweeting on September 20: “We protect the countries of the Middle East, they would not be safe for very long without us and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!”

Following the Algiers meeting, the price for UK benchmark crude Brent briefly hit $82.55 per barrel — a level not seen since November 2014 — and US benchmark crude West Texas Intermediate traded at more than $72 a barrel. The same day, Trump, addressing the UN General Assembly, blasted OPEC for “ripping off the rest of the world” by keeping global oil prices elevated.

Trump, deeply worried about a potential congressional power shift after US midterm elections on November 6, had been pressing Saudi Arabia to help boost oil output to lower American petrol prices ahead of the elections. However, Trump’s resumption of oil export sanctions on Iran, which take effect November 4, has been a key underlying factor in sustaining oil prices at higher levels.

The Trump administration introduced its first set of new sanctions on Tehran in August, including restricting the purchase of US dollar banknotes and trade in gold and sales of some metal products. It is the second round in November, however, that is expected to sting the most for Iran. Just how much of Iran’s crude exports will be halted and how quickly are unknown and that uncertainty is causing unease in the oil market.

Though the Trump administration has declared its intention to reduce Iran’s revenue from its crude sales to “zero,” Washington realistically expects Tehran’s exports to be cut 30-50% — 700,000 to 1 million bpd from the current approximately 2.1 million bpd.

In Algiers, OPEC President and UAE Oil Minister Suhail Mohamed al-Mazroui pointedly said: “OPEC is not a political organisation and does not succumb to political pressures.” Also speaking at the September 23 gathering, Russian Oil Minister Alexander Novak argued that “the sanctions and trade wars imposed by some powers will have an effect on the global economy and therefore on the oil market,” a clear reference to US sanctions on Iran and Russia and the escalating US-China trade war.

Saudi Oil Minister Khalid al-Falih said the oil market appeared balanced and sufficiently supplied and claimed that OPEC members had provided extra supplies to the market in the last three months to account for reduced Iranian crude exports. He said any increase in Saudi production levels would be in response to customer demand and not the result of efforts to influence prices.

Falih emphasised that the kingdom’s surplus oil production capacity was 1.5 million bpd, which he said could be tapped into within days or weeks and reiterated a recurring official Saudi talking point: “The market is what determines the oil prices.”

Riyadh appeared to have been supportive of accommodating Trump’s desire for lower oil prices ahead of the US midterm elections but after temporarily shelving plans for the initial public offering of Saudi Aramco and no longer envisioning oil prices of $90-$100 a barrel to push up the value of the state energy firm, the Saudi government may well have found its sweet spot at $80 per barrel.

Some oil analysts doubt Saudi and Russian claims to have sufficient sustainable spare production capacity to meet demand if as much as 1 million bpd of Iranian crude disappears from the market. In addition, political and economic crises in Venezuela and Libya could further erode global crude supplies.

Not surprisingly, these concerns are prompting analyst expectations of $90-$100 per barrel in 2019, which could cause demand to collapse and trigger worldwide economic repercussions.