IS OPEC UNDERESTIMATING U.S. SHALE (AGAIN)?
It looks like OPEC and Russia are deliberately overtightening the oil market and won’t call the end of the cuts yet, aiming at higher oil prices and shrugging off (at least in the short term) the potential threats to the oil market balance—a shale surge and possible slower demand growth.
The oil production cuts and healthy oil demand growth have helped the global inventory surplus to nearly vanish and it certainly looks very much like OPEC and allies have a “mission accomplished” within reach.
That’s the verdict of the International Energy Agency (IEA), which said last week that OECD crude oil stocks at end-February were just 30 million barrels above the five-year average—with product stocks actually below it—compared to a glut of more than 300 million barrels at the start of the production cut agreement that OPEC and Russia-led non-OPEC partners have been implementing since January 2017.
Today, a leaked OPEC/NOPEC report suggested that the lingering overhang was even smaller—at 12 million barrels above the five-year average.
Still, there are no signs that OPEC and friends would be rushing to declare ‘mission accomplished’. Even the usual OPEC/Russia chatter of ‘gradual exit’ from the cuts once they expire at end-2018 has not been heard on the market for a couple of months. Instead, we’re hearing more reports that OPEC’s de facto leader Saudi Arabia would rather overtighten the market, shooting for oil prices higher than the current around $73 a barrel Brent, which is already a more than a three-year high.
An OPEC/non-OPEC ministerial monitoring panel is meeting in Jeddah, Saudi Arabia, on April 20 to discuss the state of the oil market and possible long-lasting cooperation. According to analysts, OPEC (Saudi Arabia) and Russia look determined to continue with the cuts at least until their official expiry date at the end of 2018, despite the fact that their official target—bring OECD oil stocks down to their five-year average—could be achieved any moment now.
According to a Bloomberg source, 12 nations part of the OPEC+ pact will be meeting in Jeddah on Friday—the energy ministers of Saudi Arabia, Russia, the UAE, Algeria, Kuwait, Venezuela, Iraq, Oman, and Brunei, plus representatives from Azerbaijan and Kazakhstan, and the head of Libya’s state oil firm. Any proposals or recommendations that this group would agree upon need to be later ratified by the full-line-up meeting in June.
But it looks like this week the partners won’t be hailing the mission as accomplished and may even discuss moving the goal posts—changing the current ‘five-year average’ metric they use to measure the success of the production cut pact—to justify that the cuts would be in place until the end of 2018.
“All of the various suggestions that have been floated would give OPEC a rationale to continue cutting,” Mike Wittner, head of oil market research at Societe Generale, told Bloomberg.
Although the official goal is to bring inventories back to normal levels, unofficially, the target is to prop up oil prices. Even at above-$70 oil now, Saudi Arabia is reportedly aiming much higher and would even let oil prices rise to as much as $100 a barrel.
The higher oil prices would help the cartel and allies to patch up their budgets that have been suffering from the low oil prices for three years now. Saudi Arabia ran budget deficits that were unthinkable before 2014, and its breakeven budget price is said to be upwards of $80 oil. Then, there’s the much-hyped Aramco IPO, ahead of which Riyadh is also looking for higher oil prices to boost the valuation of its giant oil firm.
Despite the fact that oil at $80 or $100 could backfire on both global supply and demand, with U.S. shale soaring further and demand growth possibly slowing down, analysts see the shortest-term higher budget revenues as the rationale for Saudi Arabia and the cartel to want oil prices so high. In short, they would prefer to rake in the windfall now and think of the state of the oil market later.