I have written about this topic before, but it deserves a review at this crucial point in time where the oil markets are concerned. Just half a year after they agreed to implement significant new cutbacks in their crude oil exports, ministers from the so-called OPEC+ countries (OPEC plus non-OPEC nations like Russia, Mexico and Kazakhstan) will likely be asked to cut back even more when – or if – they meet next in July.
I say “if” because, as of this writing, the OPEC+ nations can’t even agree to a specific date on which to hold their proposed July meeting in Vienna . Saudi Energy Minister Khalid al-Falih said over the weekend that he is “hoping” that the OPEC nations will meet at some point during “the first week in July,” but could not say whether or not the non-OPEC nations would agree to join the meeting.
Minister al-Falih’s remarks only serve to add more uncertainty to a market that has already been plagued by that dynamic in recent weeks, as crude prices have dropped by about 17% over the past month. A series of unanticipated crude inventory builds have led to speculation that the market is currently over-supplied. That speculation was exacerbated late last week, as the International Energy Agency (IEA) cut is crude demand growth forecast for the second half of 2019 by 100,000 barrels of oil per day (bopd).
The IEA forecast cut comes amid speculation that the ongoing tariff battle between the U.S. and China has resulted in a slowing of Chinese economic growth. Combine that with the ongoing collapse of production from Venezuela, disruptions of supply from OPEC members like Nigeria and Libya, and the series of attacks on crude tankers in the Persian Gulf and Gulf of Oman, and you have the most unstable market situation we’ve experienced in recent years.
Still, despite all of those ongoing uncertainties, Minister al-Falih said that he is “…fairly confident that fundamentals are going in a right direction” as he and his fellow ministers prepare for their hopefully-upcoming meeting.
Of course, the other major factor complicating decision-making for the OPEC+ nations is the ongoing oil boom in the United States shale plays, and the resulting increasing share of global demand being met by U.S. production. Following an unexpected drop during February, domestic production rebounded dramatically in March, and was up by almost 19% over production levels for March 2018. Indeed, in its new Statistical Review of World Energy published on June 11, oil giant BP finds that the U.S. oil industry increased production by 2.2 million bopd during 2018, an all-time record rise by any country. BP also found that U.S. crude reserves now are the highest in the world, surpassing both Russia and Saudi Arabia.
Obviously, the continuing supply boom in the U.S. places even more pressure on the OPEC+ countries to reduce their own exports if they wish to support a global crude price at or above current levels. Because the reality is that the free-market nature of the U.S. domestic industry ensures that it is going to keep on drilling more wells and raising domestic production as long as doing so is profitable.
Thus, just as it did last December, when the OPEC+ countries agreed to enact about 1.4 million bopd in export reductions, the question once again becomes how many more times they are going to be willing to extend their agreement and how much more of their own exports will they be willing to cut in the face of ongoing U.S. hegemony in the global market? The fact that the ministers still have yet to even agree to a firm date to hold a meeting is a good indicator of the level of disagreement that must exist within the group on the subject of making further cuts in order to re-balance the market.
The prevailing conventional “wisdom” appears to be that they will take their medicine one more time, and agree to at least extend their agreement through the end of 2019, and possibly make further cuts to their export levels. One thing is certain: The U.S. industry, which has benefited greatly from the OPEC+ agreement, is holding its collective breath hoping that does happen. Because if it doesn’t, this great oil boom of the past few years could turn into another bust almost overnight.