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Abu Dhabi, UAEMonday 21 January 2019

Testing times to continue as Opec heads into uncharted territory in 2019

Surging US production, Iranian sanctions and struggle for relevance will still dominate the group's agenda

Qatar, Opec's fifth-smallest member contributed to 1.8 per cent of the group's total production. Reuters
Qatar, Opec's fifth-smallest member contributed to 1.8 per cent of the group's total production. Reuters

The past 12 months have been rough for the oil markets and for one of its biggest influencers, Opec, which has weathered periods of highs and lows, forged plans for a super-group and dealt with the exit of Qatar.

Next year is unlikely to be easy either. US oil production is at a record high, Brent oil prices have crashed by 40 per cent since early October and the global economy is in a slowdown mode. Opec has reacted swiftly to the developments, convening in December in Vienna, where the group is based. After a lengthy and protracted discussion, Opec+, the alliance that includes the exporter-group and allies led by Russia, decided unanimously to cut 1.2 million barrels per day from January for six months.

However, the meeting happened under the shadow of Qatar’s exit, which said it would leave the group in January to focus on ramping up its gas production. Despite being one of Opec’s founding members, Qatar’s production was minimal in comparison with its oil-rich neighbours in the Arabian Gulf.

Swiss bank UBS expects Opec to extend the current output restriction deal, which is set to be reviewed in April.

“There are still many moving parts,” said Giovanni Staunovo, commodity analyst at UBS. “It will depend among others if the US administration releases SREs [significant reduction exemptions] for Iranian oil or not, and where US production stands. The target of Opec+ is too keep the oil market in balance,” he said.

His views are not far from what Suhail Al Mazrouei, UAE Energy Minister and Opec president, said in Kuwait this week. “The planned cuts have been carefully studied, but if it doesn’t work, we always have the option to hold an extraordinary Opec meeting, and we have done so in the past.”

“If we are required to extend for another six months, we will, if it requires more, we always discuss and come up with the right balance,” the minister said.

High compliance to Opec decisions in 2018 is likely to be replicated in 2019, which may help to instil some optimism in the markets.

“Compliance is likely to be high because of Saudi Arabia leading by example, and the UAE and Kuwait likely also cutting in line with their agreed levels,” said Mr Staunovo.

“On top, falling production in Iran and Venezuela should help Opec achieve relatively quickly the announced 800,000 bpd production cut. Non-Opec might take a bit longer to reach the agreed level, considering the gradual cut in Russian production.”

Mr Staunovo does not expect Qatar’s exit to affect the unity of the group, with newer members likely to join. Mr Al Mazrouei had said Ghana and possibly South Africa could join Opec.

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Nevertheless, 2019 is likely to be a challenging year for Opec and its allies. While there is positive news of the alliance between Saudi-led Opec and Russian-led non-member sovereign producers being institutionalised into a larger super-group, possible tightening of US waivers to countries importing from Iran will continue to rattle markets.

A bigger worry for Opec+ is continuing to maintain relevance at a time when surging US supply has transformed the country into the world’s largest producer of crude, having topped 11 million bpd, outpacing both Saudi Arabia and Russia.

The scene at the end of 2018 is a far cry from January. The year began with a three-year record rally in oil prices, with the price of Brent averaging about US$70 (Dh257) per barrel for the first half, after Opec and its members successfully managed to lower five-year inventory levels. Such high oil stock levels resulted in a glut that brought prices down to as low as $26 per barrel in 2016 from more than $100 in 2014.

However, Opec has had to contend with a number of expected and unexpected geopolitical headwinds that have forced it to make decisions to placate various parties.

US President Donald Trump has tweeted about Opec since the start of the year and was one of the most vocal external forces influencing group policy and supply this year. The run-up to the sanctions on Iran, which came in to effect on November 5, also instilled fear in the markets as well as the group regarding shortages. Mr Trump had been pushing for prices to go lower, to appeal to his voter base before the November US midterm elections.

Opec and its allies in May boosted output, a move that somewhat appeased Mr Trump.

The reversal of cuts did not have the intended effect as oil prices continued to rally, with Brent touching a four-year high of more than $86 per barrel in early October.

The exuberance of the markets, though, was short-lived. The waivers granted to countries importing Iranian oil dispelled the myth of shortage with the markets having adequate crude supply.

What happened in November shocked traders and analysts as oil lost 30 per cent of its value, crashing to $58 per barrel. The drop cheered Mr Trump more than Opec, which requires prices to be high to balance budgets.

The oil rout required the group to rethink boosting supply and instead forced them to adopt production cuts again.

Updated: December 27, 2018 11:07 AM

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