Global inventories are still rising, and are likely to exceed the normal by more than 1 billion barrels by the end of this year, writes Robin Mills.
Oil price uncertainty to persist despite producers’ meeting in Algeria
In the struggle to rebalance the oil market, observers have twice declared victory prematurely.
Recent comments by the Qatari and Saudi oil ministers, reviving hopes of an agreement on limiting Opec’s output, have triggered a further recent bounce. But the market is still far from “balance”, and even this mythical state would not mean a return to comfortably high prices.
In the early stages of the current slump, back in the middle of last year, Brent crude rebounded above US$63 per barrel before a further crash towards the end of the year. Supply disruptions in Canada, Nigeria and Libya drove a further up tick until May this year, which was hailed – too early – as the eagerly awaited “rebalancing”.
But prices dropped again, with Saudi production last month reaching new records, before a 6 per cent gain last week on renewed discussion of Opec action.
A statement by the Saudi oil minister Khalid Al Falih, released on Thursday, then withdrawn and re-released early on Saturday, repeats the declaration that the market is on the way to balance.
Mr Al Falih’s comments support his Qatari colleague, Mohammed Al Sada, in pointing to the informal meeting of Opec and non-Opec ministers at the International Energy Forum gathering in Algeria in September. This will recall the failed meeting in April in Doha, when at the last minute Saudi Arabia withdrew its support for a deal on freezing production levels that did not include Iran.
The objective conditions for a freeze are better now, mostly since Iranian production is approaching its pre-sanctions levels.
But the intra-Opec politics may still not be right. The Iranian petroleum minister Bijan Zanganeh has said the organisation should return to quotas per country, a policy abandoned in 2011.
So much has changed since then, making new quotas a thorny problem. Nigerian and Libyan production has been seriously disrupted by violent unrest, while repeated attempts to reach a deal between Libya’s eastern and western factions hint at the prospect of revival. Neither country could commit to a freeze at levels well below its aspirations.
Iraq has reached an agreement with Shell, BP and Lukoil on restarting investment, which could result in growth resuming after a tepid 2016.
The number of US rigs drilling for oil has increased for the past seven weeks, with mid-size shale producers such as Pioneer and EOG speaking bullishly of their ability to produce profitably even at current prices. The summer is usually a strong period for demand, with the US driving season and high use for Gulf air conditioning. The autumn demand will be weaker, and India appears to be slowing.
What does balance in the oil markets mean? It indicates that demand would once again equal or exceed supply, and the remorseless accumulation of stocks since mid-2014 would stop, then reverse.
If Opec production stays at current record levels, then the market might be in deficit by about 600,000 per day next year. Allowing for a resumption of production growth in Iraq, some further gain in Iran, and possible – if shaky – recoveries in Libya and Nigeria, partly offset by a continuing decline in desperate Venezuela, the shortfall could be even lower.
Global inventories are still rising, and are likely to exceed the normal by more than 1 billion barrels by the end of this year. Even allowing for some oil permanently locked in Chinese strategic reserves, it could take two years or more to clear the huge stock overhang. Prices would rise in this period, but that gives encouragement to oil companies to resume investing in new production.
In the absence of real prospects for market management, trying to jawbone prices upwards is counterproductive. Empowering speculation without changing fundamentals just encourages competing producers to hold out. It is not worth spending Opec’s long-term credibility to buy a little short-term relief from low prices.
Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis