OPEC and its allies meet Monday in Vienna with near certainty that they will extend production cuts through at least the end of the year to support oil prices under pressure from slowing global demand and record U.S. production.
The Organization of the Petroleum Exporting Countries has kept output caps in place for much of the past two years in a bid to lift oil markets, which have consistently defied forecasts of imminent shortages and skyrocketing prices — even amid heightened tensions in the Middle East. Crude has already given back some of the gains that followed the recent downing of a U.S. drone by Iran, trading in New York at about $58 a barrel, some 20 percent below the $74 a barrel price a year ago.
The extension of the production caps is critical to the Houston oil and gas industry, which is feeling the squeeze from lower than expected oil prices, disenchanted investors and shrinking budgets. Analysts say that OPEC members have little choice but to maintain the combined production cuts of 1.2 million barrels a day or risk another crash in oil prices.
“This should be an easy one because everyone knows the alternatives are worse,” said Matt Reed, vice president of Foreign Reports, a Washington consulting firm focused on Middle East oil politics
The outcome of the semiannual meeting appeared all but assured over the weekend when Russian President Vladimir Putin and the de facto ruler of Saudi Arabia, Crown Prince Mohammed bin Salman, struck a deal at the G-20 meeting in Japan to extend the combined production cuts of 1.2 million barrels a day for up to nine more months. Russia and Saudi Arabia are the biggest producers in the expanded cartel known as OPEC+.
The agreement among all members, however, is unlikely to come without hemming, hawing and grandstanding, analysts said. OPEC, they noted, was originally scheduled to meet in June, but pushed it into July because the countries couldn’t agree on a meeting date.
Other dynamics are at work, too. Saudi Arabia, which has borne the brunt of the output cuts, is likely to pressure Iraq, Nigeria and other countries to take up more of the load. Iran and Venezuela, both reeling under U.S. export sanctions, are angry and aggrieved as other OPEC members slice into their market shares.
Iran and Saudi Arabia, meanwhile, remain bitter rivals for influence in the region as they fight a proxy war in Yemen. Tensions between the two countries were heightened recently by the bombing of oil tankers in the Strait of Hormuz.
Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact in Washington, gives the meeting a 20 percent chance of going haywire and failing to agree on anything.
“Iran is the most irritated, but Iran doesn’t have a lot of cards to play except being a spoiler,” he said. “If you don’t deliver a rollover, then the market is going to tumble, and I don’t think anyone really wants that.”
Concerns about slowing global demand for oil are increasing, putting more pressure on OPEC+ to hold the line on production. The International Energy Agency in June cut its forecast for worldwide oil consumption this year by 100,000 barrels a day.
The projected weakening in energy demand is the result of a slowing global economy, weighed down by trade conflicts between the United States, China and other countries. Meanwhile, the growth in U.S. oil production is on pace to exceed the increase in global demand — a recipe for higher crude inventories and lower prices.
“OPEC and its allies are holding their breath, waiting to see where demand goes and whether trade wars are resolved,” Reed said. “The only sensible option is to stay the course, I think. Relaxing cuts could easily turn into another price war.”
Avoiding a repeat
The OPEC nations may not like it, but the cartel’s relatively new strategy of tweaking its agreed-upon production cuts every six months is working, so far keeping record U.S. crude output — estimated at 12.4 million barrels a day — from precipitating another oil bust.
OPEC’s strategy is largely in response to the ongoing U.S. shale boom. In 2014, with oil prices near $100 per barrel and U.S. production soaring, OPEC thought it could flood the market and kill off or dramatically weaken U.S. shale producers, whose costs were higher.
The worst oil bust in a generation ensued, decimating much of the industry and eliminating tens of thousands of Texas jobs. It largely ended when a weary and battered OPEC decided at the end of 2016 to curb crude production for the first time in eight years.
What emerged from the wreckage was a more efficient and productive shale sector that has made the United States the world’s biggest oil producer. Now, the concern for many OPEC nations is there’s no obvious end in sight to their cutbacks as U.S. production seems to only increase.
Unlike countries such as Saudi Arabia and Russia, where government-controlled oil companies set output, levels, U.S. production is determined by private companies reacting to the marketplace. All OPEC can do is watch and adjust to the flow of oil from here.
“The organization’s overriding goal is to avoid runaway prices and volatility, especially now, when there are genuine fears of a global recession,” Reed said. “So far it’s a winning strategy for everyone. And who can argue with the results in the U.S. when production is at an all-time high?”
houstonchronicle.com · July 1, 2019