The public decency law aims to regulate social behavior in a way that reflects positively on Saudi Arabia’s image, the anti-harassment law is meant to regulate public behavior among individuals in society.
OPEC ministers are set to mark the one-year anniversary of their historic production pact with their non-OPEC counterparts on November 30 with oil prices up by a sharp $10 per barrel (/bbl) on average so far this year and oil revenue higher by a significant 25 percent, far outpacing the relatively modest supply cuts by producer countries. The producer alliance is widely expected to extend the agreement beyond March 2018, by a further six or nine months, in an effort to reduce still high global inventories. OPEC’s production strategy is aimed at rebalancing oversupplied markets, with its goal to reduce oil stocks to within the five-year average range of OECD inventories but, so far, is just over halfway to its target level.
“We have gone over 50 percent in reducing excess inventories but that means we still have some excessive inventories that we need to drain,” Saudi Arabia’s Minister of Energy, Industry, and Mineral Resources Khalid al-Falih said on November 14. In reference to the upcoming ministerial meeting, he added: “We need to recognize that by the end of March we’re not going to be at the level we want to be which is the five-year average, that means an extension of some sort.”
However, conflicting supply and demand forecasts for 2018 from the OPEC Secretariat and the International Energy Agency (IEA) have added a high level of uncertainty about just when, or even if, a balanced market will emerge next year. The contrasting forecasts have sparked debate among some member countries on how long the production cuts will need to be extended in 2018 to hit the five-year target, and have raised market concerns that reaching a consensus for a new agreement will be problematic.
Benchmark oil prices have steadily strengthened in recent months but appear to have stalled in the past week due to a perception by some that OPEC and its partners may fail to deliver a strong agreement at the November 30 meeting. Oil prices by mid-November were trading at the highest level since June 2015, fueled by a combination of escalating political risks in Iraq and Saudi Arabia, stronger demand, reduced supplies, and a growing consensus that the November 2016 Vienna pact would, in all probability, be extended through the end of 2018. Futures prices nonetheless continue to trade at lofty levels, with international Brent around $62-63/bbl, U.S. West Texas Intermediate (WTI) at $57-58/bbl, and the OPEC basket at $60-61/bbl.
Conflicting Market Forecasts May Complicate Vienna Negotiations
In their November monthly oil market reports, the OPEC Secretariat painted a much more bullish picture of a drawdown in stocks that will lead to a rebalanced oil market early next year, while the IEA cautioned global oil inventories will most likely continue to increase in 2018, further delaying the reduction to the five-year average. The key variable between the contrasting forecasts is in the projections for non-OPEC supply growth, with the IEA 40 percent higher than OPEC.
The OPEC Secretariat has forecast growth in non-OPEC supplies at a relatively low 870,000 barrels per day (kb/d) for 2018 compared to IEA estimates of an increase of 1.44 million barrels per day (mb/d). The U.S. Energy Information Administration (EIA) sees even more robust growth in non-OPEC supplies of 1.52 mb/d next year. Growth in U.S production is the dominant driver of non-OPEC supplies but the IEA also sees Canada, Brazil, and the United Kingdom as notable sources of growth offsetting declines in China, Mexico, and elsewhere. By contrast, OPEC forecasts that growth rates in some non-OPEC countries will be canceled out by declines in others.
A major discrepancy among the non-OPEC supply forecasts is in the outlook for total U.S. production, including shale, with OPEC seeing growth of 870 kb/d, the IEA a higher 1.1 mb/d, and the EIA an even stronger 1.23 mb/d. The three major forecasting agencies are projecting varying growth rates for shale crude oil, of between 620-900 kb/d in 2018. Differing estimates for lighter natural gas liquids supply are also behind the wide range for total U.S. production.
The EIA noted its robust growth estimates are supported by the exceptionally strong level of high-yield bonds issued by U.S. exploration and production companies in October to fund future development, which, at $3.6 billion, was the largest amount issued during any month in 2017. In addition, higher capital spending, improved cash flow, and increased hedging activity, which locks in prices for future production, are fueling stronger growth rates, the EIA said. Underscoring the stronger growth trend, tight oil production growth averaged just 60 kb/d in the first six months of the year compared to a projected rise of 700 kb/d in the second half of 2017, for a full year average of 360 kb/d, according to the latest EIA data.
Marginal variances between the IEA and OPEC forecasts for global demand also bolstered the latter’s more bullish outlook. OPEC is projecting a relatively stronger growth rate of 1.5 mb/d for 2018, reflecting upward revisions in a number of countries, including China and India. By contrast, the IEA reduced growth by 100 kb/d, to 1.3 mb/d, on expectations that stronger prices and milder winter weather would curb consumption next year.
Divergent Global Oil Stock Trends
OPEC’s scenario of stronger demand growth and lower growth in non-OPEC supply imply a significant inventory drawdown of 670 kb/d on average in 2018, which suggests the market could be in balance by the second quarter. By contrast, the IEA’s forecast for robust non-OPEC supply growth implies a stock build of 300 kb/d next year, after a drawdown on average of 230 kb/d in 2017, which suggests the five-year average mark will not be reached until the end of 2018 or early 2019. The first quarter of 2018 could prove especially weak, the IEA noted. “Using a scenario whereby current levels of OPEC production are maintained, the oil market faces a difficult challenge in 1Q18 with supply expected to exceed demand by 600 kb/d,” the IEA said. The most recent data on stocks show a further drawdown in OECD commercial oil inventories. Despite some setbacks, including resurgent shale, the Vienna pact to reduce production is significantly reducing global supplies. Stock levels above the five-year average were estimated at 119 million barrels in September compared to almost 340 million barrels in January, when the agreement went into effect.
OPEC Production Edges Lower
One area of agreement between the two outlooks is their estimates for OPEC production, with both agencies reporting a decline in October. Total OPEC oil production in October was 32.6 mb/d, a decline of 150 kb/d, according to industry secondary sources reported by the Secretariat, which the data ministers use to measure compliance with quotas. OPEC compliance rose to 104 percent in October, up from 92 percent in September. Year to date, compliance has averaged a strong 97 percent, with OPEC’s overachievers removing an extra 150 kb/d over the period, only partially offsetting the group’s underachievers, which collectively overproduced by almost 200 kb/d. Saudi Arabia accounted for three-quarters of the lower volumes from January to October while Iraq was responsible for just over half of the higher volumes.
Iraqi production in September fell by 130 kb/d to a 13-month low of 4.38 mb/d in the wake of the conflict between the central government in Baghdad and the northern Kurdistan Regional Government. As a result, compliance rose to 85 percent in October compared to just 22 percent in September. Year to date, however, Iraq’s adherence to its quota is just 51 percent. Continued negotiations between Baghdad and the Kurdistan Regional Government over production and revenue issues are expected to keep the country’s output curtailed in the near term, with lower northern supplies only partially offset by increased southern exports.
Compliance by the Vienna pact’s non-OPEC countries averaged 107 percent in October, down from 142 percent in September. For the year to date, the group’s compliance is estimated at 81 percent, according to the IEA. The group of 10 countries reduced production by 587 kb/d to 18.3 mb/d in October, with exceptionally low output from Mexico accounting for 40 percent of the decline, more than double its pledged cut. Russia, which accounts for half of the group’s cuts at 294 kb/d, was 98 percent compliant in October, bringing its year-to-date average up to 80 percent.
Managing Market Expectations
Reconciling the various supply and demand forecasts will be a major challenge for the group’s Joint Ministerial Monitoring Committee when it meets on November 29. New and revised data since the OPEC Secretariat and IEA forecasts were prepared should be available by then, which could help clarify the disparate outlooks.
In addition, OPEC has organized a seminar on the outlook for shale oil growth on November 29 to help form a view for its deliberations. The technology-driven shale oil revolution has consistently upended OPEC’s market expectations and the organization is increasingly reaching out to U.S. oil producers and experts to garner a greater understanding of the light, tight oil’s growth potential. Representatives from Citigroup Inc. and U.S. oil services company Schlumberger, among others, are scheduled to give presentations. This is the second time OPEC has called in outside experts to provide an industry perspective, with IHS Markit and Centennial Resources giving presentations to ministers before the formal meeting in May.
While the major forecasting organizations are divided on the outlook for 2018, a growing consensus among industry analysts has reasoned that a further nine-month extension is needed to rebalance markets and argues a decision that sets a shorter timeline of three or six months will have a negative impact on prices. Rumblings against a nine-month extension from Russian companies responsible for reining in production are behind the growing uncertainty. Ironically, it was Russian President Vladimir Putin who proposed on October 4 an extension of the supply cuts until the end of 2018, which raised market expectations. Putin said during an energy forum in Moscow that when OPEC and its allies decided to extend the cuts, “this should be at least until the end of next year.” Prior to this, OPEC ministers were considering prolonging the agreement by months but not for all of 2018.
Russian oil ministry officials met with the country’s main oil producers on November 21 to discuss their willingness to extend production cuts. Though there were no official comments, TASS news agency reported discussions focused on a six-month extension, three months shy of the nine-months proposed by Putin. OPEC Secretary General Mohammad Sanusi Barkindo indicated that Putin’s statement was the basis for ongoing premeeting discussions. Putin “gave a very pointed answer, which we are taking very seriously — this was the president talking,” according to Barkindo.
At the same time, a number of analysts and OPEC officials have suggested that Russia and others may be trying to inject some level of uncertainty leading up to the meeting in a bid to avert a repeat of the market’s negative reaction to the group’s widely signposted plans at its last ministerial meeting in May. Somewhat ironically, OPEC’s effort to provide for more transparency in its decision making process had the unintended consequence of sending oil prices lower once the agreement was announced.
At the time, oil prices had fallen to five-month lows by early May amid growing concern over resurgent shale. In the weeks leading up to the late-May meeting, there was a series of coordinated statements by both Falih and Russian Energy Minister Alexander Novak designed to reassure markets the Vienna pact producers were prepared to take further steps to tighten markets and that an extension to March 2018 was all but a done deal. In response, prices rose by a sharp $5/bbl leading up to the meeting. However, some analysts argue that by pre-empting the meeting’s outcome the formal agreement then proved anticlimactic and left markets disappointed that an even stronger agreement that included further cuts was not reached. In the event, oil prices tumbled, with benchmark Brent falling almost $3/bbl the day of the meeting and by a further $6.50/bbl within a month.
Market machinations aside, OPEC officials say there is a groundswell of support for a nine-month extension and expect a formal agreement on this basis when ministers gather at the end of the month. A nine-month extension of the cuts is already factored into current price levels and the producer alliance is acutely aware that failure to ink the much-touted deal would almost certainly send oil prices plummeting.
Falih has also reassured markets that Russia and Saudi Arabia, the key architects of the agreement, are on the same page. Falih said earlier in November that the kingdom has had “extensive” consultations with Russia and is “fully convinced” that it will be “fully onboard.” Underscoring the high level of cooperation between the two countries, on November 21 Saudi King Salman bin Abdulaziz and Putin discussed continued cooperation on oil production cuts, among other issues.
If the Houthis believe their military offensive in Marib is in danger, they will likely look to the only real ally they have, Iran.
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