Ahead the OPEC meeting to be conducted in Vienna this week, energy consultant Wood Mackenzie examined the current landscape around the oil production supply and demand taking into consideration the role of US, Russia and other leader countries, as well as the potential influence of Qatar’s withdrawal from the group, noting that the move will likely not affect significantly the supply.
According to Ann-Louise Hittle, Vice President, Oils Research at Woodmac, Qatar produces small amounts of oil, approximately 600,000 to 650,000 barrels per day with minimal spare capacity. Although its exit will not affect the oil market, it is a challenge for the group since the latter has to control the production.
Yet, Vladimir Putin pointed out that Russia will collaborate with OPEC and Saudi Arabia to assure production restraint during 2009.
It is possible that Qatar is exiting the oil market since it focuses on being a global gas producer. Moreover, Saudi Arabia is keen to reduce output, whereas the US is pressuring for lower prices.
According to Ann-Louise Hittle, the global supply is to increase by 1.7 million b/d year-on-year. Oil demand is expected to increase by 1.0 million b/d year-on-year in 2019. Meaning that there will be an implied stock build next year, even with production restraint of about 0.8 million b/d.
The alternative solution would be a reduction in prices, where is it believed that President Donald Trump has already played a crucial role by pressuring for lower prices that could prevent an OPEC+ agreement.
Moreover, President Trump’s focus on lowering the prices comes with him aiming on ‘Energy Dominance’, meaning that he supports the US oil and gas industry and that he protects the economic development. He has already achieved the decline from $85 to the $60-$69 range for Brent.
Trump’s aim has been designed to protect the relationship with Saudi Arabia and to show the benefit of US-Saudi relations by addressing the lower oil prices that were achieved in November. The administration is strongly in favour of working with Saudi Arabia to curb Iran’s influence in the region.
Ann-Louise Hittle believes that OPEC will lower production in order to prevent an oversupply in 2019. It is expected that the cut will make stable prices and prevent future declines. Another matter is the increasing rate of demand and the possibility of an economic slowdown.
OPEC’s challenges are:
- Reaching an agreement on the size of the cut;
- Dividing the reduction amongst its members.
The challenges are that Saudi Arabia would like to see other producing nations adhere to production cuts so it does not carry the burden alone. Libya and Nigeria are currently exempt from production restraint and their status needs to be considered. Iraq will be another tricky issue since it is seeing production growth and capacity gains.
Finally, President Trump has not pressure OPEC and S. Arabia to reduce the oil prices.
