The writing is on the wall. Crude stakeholders are now beginning to comprehend the bitter reality that the market glut is stubborn and difficult — if not impossible — to overcome. And this carries long term consequences.
With a Covid-19 vaccine unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provides a difficult backdrop to the meeting of Organisation of the Petroleum Exporting Countries (Opec) and their allies, later this month, the International Energy Agency (IEA) said in its November Oil Market Report. In the report, the IEA cut its oil demand estimates for Q4 2020 and for the whole of 2020, as well as for Q1 2021.
What could the Opec and its allies in the extended Opec+ do in the circumstances? Would they go ahead with their already announced increase in output from January 2021? That is now doubtful. The emerging scenario is also putting the viability of the Opec as an effective organisation in question.
With the second and relatively severe wave of the Covid-19 pandemic underway, the Opec has also lowered its 2020 oil demand forecast by 9.8 million barrels per day (bpd), Opec’s secretary- general, Mohammad Sanusi Barkindo said in his statement at the Joint Ministerial Monitoring Committee (JMMC) of the organisation on November 17. The number marks a drop of 0.3m bpd from the group’s October meeting and an overall reduction of 11m bpd against a growth of 1.2m bpd projected in January before the outbreak of the pandemic, Barkindo highlighted. The Opec has also revised down its expected growth for 2021 to 6.2m bpd as against 6.5m bpd projected earlier.
With the crisis continuing, the Opec Joint Technical Committee (JTC), responsible for providing technical and market insight to its ministers has suggested the organisation to consider delaying its planned output boost between three and six months.
Talking to the media, Opec sources hinted last week that many members were in support of extending the production cuts that were supposed to ease 2.0m bpd in January to 5.7m bpd. However, some were in favour of even more drastic measures, which included cutting deeper come January.
However, deepening the cuts could be challenging. Members, including Iraq, have signified that they may not be on board with an agreement unless it garners unanimous support from all members, while Libya is demanding to stay exempt from any production cut regimen until its production stabilises at around 1.7m bpd. Libyan output is rising. As against virtually zero production until recently, Libyan output has now surpassed the 1.25m bpd mark. This reality has added nearly a million bpd into the mix at a time when Opec+ is desperately trying to remove barrels from the market.
While the markets are faced with a stubborn glut, the Opec is also faced with an existential threat. Tough market conditions are endangering the very fabric of the group. The United Arab Emirates is understood to be holding internal discussions about its position in Opec+, Energy Intelligence reported last week.
In a sign of the growing unease, the UAE told JMMC that all members should meet their output cut commitments in full before agreeing to changes or extension of the current pact, Energy Intel quoted an Opec delegate as saying.
Reportedly some UAE officials have also started privately to ask hard questions including if the Opec membership remains in the country’s longer-term interests. The question needs to be seen in view of the need to monetise oil resources and avoid stranded assets.
As per Energy Intelligence, some in the UAE also believe current Opec+ practices serve to benefit competitors outside the group, such as the US shale producers. A version of this argument was previously made by Russian officials who claimed that Opec+ cuts — and resulting in higher oil prices — were helping US shale producers expand.
The urgency to monetise the assets at the earliest possible is also making others look into the effectiveness and the need for Opec. A Saudi study in 2018 by the Riyadh-based King Abdullah Petroleum Studies and Research Center (Kapsarc) caused a stir when the think tank asked similar questions, looking at short- and medium-term oil market scenarios if Opec were disbanded.
However, Kapsarc President Adam Sieminski later told Energy Intelligence that the study was neither directed by the state nor reflective of official Saudi thinking, but an exercise of thinking “outside the box”. Yet, to be fair, the study in itself was interesting.
The very future of the Opec as an organisation — and that too an effective one — seems to be under the hammer.
Published in Dawn, November 22nd, 2020