OPEC, Non-OPEC Countries to Finalize Permanent Framework Ahead of US Sanctions

Published September 19th, 2018 - 06:53 GMT
Crude is averaging about $72 a barrel this year, and the International Energy Agency warned last week that prices could rise above $80. (Shutterstock)
Crude is averaging about $72 a barrel this year, and the International Energy Agency warned last week that prices could rise above $80. (Shutterstock)

Oil producers aim to agree a framework for long-term cooperation to ensure oil market balancing when Opec and non-Opec members meet in Vienna in December.

Stressing the need for oil producers to stick together for the good of the global economy as Iran faces renewed US sanctions, Opec secretary-general Mohammed Sanusi Barkindo said on Tuesday in Fujairah that an agreement between Opec and non-members that cut production and helped bring prices back up from lows of $30 a barrel in January 2016 was now "a permanent feature."

"Our determination is to institutionalise this cooperation and to get the permanent framework hopefully by December," Barkindo said at the energy forum in Fujairah.

At the upcoming meeting in Algeria on September 23, oil producers will discuss the best mechanism to ensure they reach 100 per cent compliance with crude supply targets, he said amid signs that Opec's quest to balance oil markets is about to get murkier as Venezuela's economic crisis and US sanctions of Iran - Opec's third-biggest supplier - loom.

US sanctions on Iranian oil exports that will take effect on November 4 is expected to stoke further market volatility as concern about output cuts in Venezuela and Libya continue to escalate supply challenges.  

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Barkindo said Iran is a "very important producer and exporter" of oil. "When you have major producers facing supply challenges, it's of concern" for Opec and consumers alike, he said. 

Supply risks, challenges

Crude is averaging about $72 a barrel this year, and the International Energy Agency (IEA) warned last week that prices could rise above $80 unless producers compensate for lost supply from Opec members Iran and Venezuela. While trade disputes and financial woes in some countries may affect crude demand, the IEA said supply risks are the more important issue. Venezuela is pumping half as much oil as in 2016 and faces further declines amid economic upheaval.

The Opec chief praised the agreement between Opec and non-members that cut production and said the organisation would work to make it permanent. "The declaration of cooperation has come to stay," he said.

Two days ago, Barkindo voice concern over unspecified threats to global demand for crude. Oil consumption is "robust," but crude use "is beginning to face some headwinds," he said in an interview without elaborating.

Volatility persists

Oil market analysts said the Algiers could make oil prices volatile. On September 13, oil's implied volatility was 25.4 per cent, its highest since July 16. Looming US sanctions on Iran could push prices above $70.

Oil market analyst at S&P Global Platts Herman Wang said the supply challenges posed by Iran and Venezuela - not to mention volatile Libya - will put the focus on Saudi Arabia's willingness and ability to play swing producer.

"Preventing a price slump, maintaining Opec harmony and keeping Trump onside simultaneously looks increasingly unattainable," Wang said.

Analysts at Investopedia said the oil market has been caught between two narratives. The first and slightly preferred story is that oil prices could rocket to over $100 per barrel after US sanctions against Iran's oil exports come into effect in November. The other is that an ongoing trade dispute between the US and China could escalate and drag down the global economy.

"Collective increases in Opec crude production will need to carefully balance Iranian and Venezuelan sensitivities with promises pertaining to the group's official goals of seeking a balanced market and being reliable suppliers," said Harry Tchilinguirian, BNP Paribas' global head of commodity markets strategy.

Huge uncertainty

Describing the scenario as fragile, Russian energy minister Alexander Novak said there is a huge uncertainty on the market on how the countries, which buy almost two million barrels per day of Iranian oil will act.

"The situation should be closely watched, the right decisions should be taken."

In May, Opec announced that oil production cuts would be extended until March 2018. The agreement from Opec, along with decreasing US crude oil inventories, has buoyed oil prices during the second half of 2017. By late September, Brent crude price reached $59.8/barrel, which was $16 higher than the lowest price so far this year ($44/b in June) and $14 higher than one year ago.

Analysts said the robust recovery of US shale oil activity, which is expected to continue through October, is broadly expected to limit price gains in the future. Oil output from seven major US shale formations is expected to rise by 79,000bpd to 7.6 million bpd in October. 

Higher oil demand

According to the Opec Monthly Oil Market Report, world oil demand will increase by 1.3 million barrels per day in 2018, which is 0.1mb/d more than the increase expected from non-Opec oil supply.

Brent crude oil prices will average $63.4 per barrel in 2018 and decrease to $62.7 per barrel in 2019, according to the most recent forecast from the US Energy Information Administration's monthly Short-Term Energy Outlook (EIA). This reflects an upward revision of $2.5/barrel to the EIA forecast for 2018 compared to last month's Outlook.

The OECD Economic Outlook as of May 2018 was less bullish, pegging the real price of a barrel of Brent oil- i.e. price adjusted for inflation-at $69.4/barrel in 2018.

The IMF in its Primary Commodity Prices Projections asserted that after modest growth in 2018, the nominal price of Brent crude will increase to $51.8/barrel by 2020 and West Texas Intermediate to $50.4/barrel.

The World Bank anticipates that all three major benchmark oil prices, Brent, WTI, and Dubai, will continue to increase after 2020 to reach $70 per barrel in 2030.

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