With Opec+ extension into July, flexibility will be key in the future
Keeping prices in the range of $30 to $50 per barrel will allow producers to regain market share lost this year, but adjustments still need to be made monthly
Thirteen oil ministers and officials, many in face masks, gathered on Zoom, which has proved to be a surprisingly effective way to conduct diplomacy.
Most of the groundwork had already been done. Saturday’s revised Opec+ agreement is less ambitious than some suggestions, but that is good in a situation where the group has to avoid getting carried away by initial success.
The latest agreement extends existing cuts of a nominal 9.6 million barrels per day, due to end in June, into July.
This is apart from 100,000 bpd of reductions from Mexico, which dropped out after nearly torpedoing the agreement in April and will hold off 1.9 million bpd that would otherwise have come back on the market next month. It seems 1.18 million bpd of additional voluntary cuts by Saudi Arabia and its Gulf allies will not continue.
Some Opec members have not complied with the reduced output targets. Iraq, Nigeria and Angola have fallen short. From the non-Opec members of the Opec+ pact, Kazakhstan also fell short while Russia, which lagged in previous deals, is this time close to full compliance.
Libya is exempt from a quota, but the latest political developments there could revive its exports.
Members who did not meet their targets are to improve, and even make up for over-production in May and June with deeper cuts from July, although it is hard to see how that will be enforced.
From an economic point of view, Opec+ should for now err on the side of lower prices. It will repeat the mistake of 2017 if it cuts deeply for too long and allows prices to run up sharply.
West Texas Intermediate is at about $40 a barrel and Brent crude well above that, an astonishing recovery from the carnage of April. The priority now should be to regain at least all the market share lost this year, however long that takes, while keeping prices in a range of $30 to $50 a barrel.
If prices are too low, budgets suffer, while political pressure from the US will mount.
The coronavirus situation keeps worsening in Brazil, Russia, India, Egypt and Iraq, as well as in US states such as Texas, and is deteriorating again in Iran.
The threat of overflowing tanks and negative prices has receded, but further lockdowns or continuing global economic deterioration could still push down prices again. Hence, some Opec members are keen to blame any market weakness on Iraq and Nigeria, rather than again face blame from Texan drillers.
But let prices go too high and American, Canadian and other high-cost production will rebound, leaving Opec+ with a large and permanent loss of market share. A surge would also stifle economic revival and push it away from greater oil consumption. Recovery packages such as Germany’s already have a strong green tinge and avoid promoting petrol and diesel vehicles.
Even at $40 for US crude, shale producers are already reopening wells, although they are not yet ready to drill new ones. Demand is close to back to normal in China, recovering in the US and gradually picking up in Europe.
In this hazy and fast-moving situation, where Opec+ has to adjust cuts by millions of barrels per day each month, instead of the usual biannual trimming of a few hundred thousand, adaptability is essential.
Laying out a path for cuts in 2022, as was done in April, may be a useful indication of what the group thinks about the medium term, but no one has any real idea of the supply-demand balance by then.
Opec+ should ideally continue adjusting targets each month. The bad memories of the March breakdown are probably enough to hold off a repeat, for now.
The next scheduled gathering is on November 30, although the joint ministerial monitoring committee will keep assembling every month.
The new Zoom diplomacy gives more flexibility – meetings can be held on short notice, once the main players are assured a deal is possible.
Transparency of exports has greatly improved because of monitoring by satellite and tanker transponders through services such as Kpler, Kayrros, Tanker Trackers and Centinar. This is partly clouded by attempts by US-sanctioned Iran and Venezuela to conceal the destination of their shipments.
Other parts of the oil chain remain more obscure. The Joint Organisations Data Initiative – a collaboration of Opec, the International Energy Agency and statistical agencies – brings monthly reports of oil production and use. But several important countries have not updated their figures for months or even years.
Storage can partly be estimated by satellite observation of tanks, but underground holdings in China remain invisible. Oil movements by pipeline, and the amount oil producers consume in their own refineries, are not always reported accurately or on time. Timely guesses for end-user demand during the pandemic rely on satellite reports of road traffic pollution, and traffic monitoring apps.
Nevertheless, even if they do not have perfect clarity, Opec+ probably has more information than any oil market management body since the early 1970s.
That is fortunate, as shale and the coronavirus together make supply and demand move faster than ever. Working from home gives ministers the chance of managing that tricky balance in real time.
Robin Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis
Updated: June 8, 2020 01:31 AM