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Abu Dhabi, UAEMonday 10 December 2018

Exclusive: Opec looks at oil capacity buffers to counter dollar-induced price upswings

The price of the US dollar has fallen to a three-year low, pushing up the price of commodities

Suhail Al Mazrouei the energy minister of the UAE, which holds the Opec presidency this year. Chris Whiteoak / The National
Suhail Al Mazrouei the energy minister of the UAE, which holds the Opec presidency this year. Chris Whiteoak / The National

Opec is encouraging its 14 members to build oil capacity buffers to temper any wild upswings in price as a result of a weakening dollar this year, its current president the UAE’s Energy Minister Suhail Al Mazrouei said on Thursday.

"We are incentivising all the group members to have some buffers. That buffer is [to assure] that if you have a surge [in demand] or issue in one of the countries you can replace that in the market and achieve a short and medium-term re-balance of the market," Mr Al Mazrouei told The National in an interview, in response to a question on the potential downsides of a weak dollar on global prices.

The US dollar is currently trading at its lowest level in more than three years having lost two and a half per cent of its value against other currencies this year, pushing up the price of commodities including gold. Experts, including Mark Mobius of Franklin Templeton, are betting on a subdued dollar to push the price of oil to a high of $100 a barrel by next year.

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The price of Brent traded at $64.15 per barrel at 3.30pm UAE time. Brent reached a three-year high of $70.52 a barrel late in January on the back of continued cuts by Opec and members outside the exporters’ group as well as a weakening dollar.

Mr Al Mazrouei, who assumed the presidency of the oil exporting group earlier this year, expects a market re-balance "earlier than expected" despite the prospect of more US shale hitting the markets.

"If we look at the last two months of the year, of last year, [our compliance was] 122 per cent in December, 129 per cent in January. We will see an over-delivering of the commitment, so that we have a higher hope of reaching a re-balance rather earlier," he said.

North American shale is poised to flood the markets this year, and analysts forecastthat Opec’s efforts to rein in production will be dwarfed by output from the United States.

The Paris-based energy watchdog the International Energy Agency said in a report this week that US production would reach 11 million barrels per day by late 2018, a year earlier than its earlier forecast, which will see it overtake both Opec kingpin Saudi Arabia and Russia, the largest sovereign producer outside of the group.

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The US Energy Information Administration has forecast a growth of 111,000 bpd of shale in February, taking total shale production to 6.55 million bpd by the end of the month.

Mr Al Mazrouei, however, dismissed concerns of Opec losing ground to a shale influx, saying he was more worried about an undersupply in the market from slowing investments rather than a market awash with crude.

“I will put my worries not in the oversupply but on the undersupply in the future, so that’s why we’re keen [to do] this deal to [see] major investments in the exploration and production coming back into the market to give us assurance that we will achieve the balance on the supply side to the demand coming from the world,” he said.

Energy investments slumped worldwide after the price of Brent fell from a high of $115 a barrel in mid-2014 to $29 a barrel in the beginning of 2016. Upstream investment in oil and gas declined in parallel, falling 26 per cent year-on-year to $434bn in 2016, the IEA said in its World Energy Investment Report for 2017.

Investment sentiment appears to have picked up in the Middle East, which accounts for around 34.5 per cent of total global oil production, according to the BP Statistical Review of Energy. The UAE, Opec's fourth-largest producer, announced in November a capex plan of $109bn over the next five years. Kuwait in January announced a package of $500bn, which among other things will seek to raise its production capacity to 4.75 million bpd by 2040, with $114bn to be spent over the next five years.

Mr Al Mazrouei, who said last year an oil price environment that experienced swings of $40 a barrel to $60 a barrel was not encouraging for investment, noted that the global sentiment on energy investment remained lukewarm.

"We need to see it internationally as well. The region is a major contributor to the world oil as members of Opec, but I think we need to see significant investments from other parts of the world as well," he said.