If oil prices fall, markets panic, and OPEC sweats.
When oil prices rise, markets panic and OPEC sweats.
What seems to be happening now is that oil prices are at a three year high but rising at speeds that no one anticipated.
This confusion is giving rise to fears and risks despite calming statements by OPEC members, who will be meeting over the weekend hoping to have a new strategy to meet this unexpected upturn.
Kuwait, Iraq, UAE call for calm
Kuwait’s oil minister Bakhit al-Rashidi said on Wednesday that so far, there are no plans to exit OPEC oil cuts, as reported by Reuters.
“The production-reduction agreement will remain for a long time and there is no thinking right now to exit it,” Rashidi told a news conference in Kuwait City.
In November 2017, OPEC and non-OPEC member nations agreed to extend output cuts for the duration of 2018, keeping 1.8 million barrels per day of oil out of circulation.
He said a Jan. 21, 2018 committee meeting of some OPEC and non-OPEC ministers in Oman would focus on reviewing adherence to the cuts, adding that compliance in December was at 125% (from 106% in 2017), reflecting non-OPEC countries’ staying true to their commitments on production cuts.
al-Rashidi added demand for crude oil is projected to rise to around 1.5 to 1.6 million barrels per day in 2018.
Iraqi Oil Minister Jabbar Al Luaibi said on Saturday that production curbs have contributed to stability in the market and should remain.
The UAE sees no big changes in Opec policy as a result of short-term price fluctuations, Energy Minister Suhail Al Mazrouei said from Abu Dhabi.
Banks warn of demand risks,upped US production
CNBC reported that big investment banks such as Bank of America Merrill Lynch and Morgan Stanley are raising their crude price targets as Brent crude rose to $70.37 on Monday, while reached $64.9 on Tuesday, both hitting more than three-year highs.
“The banks say the long-oversupplied oil market is tightening up more quickly than expected as global economic growth fuels demand and output cuts by OPEC, Russia and several other producers eat into the world’s crude stockpiles,” said CNBC.
Merrill Lynch said oil markets are to be undersupplied by about 430,000 barrels a day bpd in 2018, up from a prior forecast of 100,000 bpd gap.
“The bank now sees Brent averaging $64 a barrel in 2018, versus an earlier estimate for $56 a barrel.
Merrill also raised its outlook for U.S. crude to $60 a barrel from $52,” according to CNBC.
“Morgan Stanley equity analyst Martijn Rats said Monday that strong capital flows into the oil market will occasionally push Brent prices into the $70-$75 range. For the third quarter of 2018, he raised his price target on Brent to $75 a barrel, up from $63 a barrel.”
Goldman Sachs says there’s a growing risk that global inventories will fall too quickly and push up prices and this will spur U.S. drillers to start pumping more, but prices will continue rising at faster relative speeds than US pumping outputs.
OPEC under pressure
Bloomberg said pressure is rising on OPEC to develop a long-term output plan as the oil cartel and Russia try to plot a way out of their production cuts.
“Even if prices exceed the $70 mark, transitioning away from supply cuts is not going to be smooth, with growth in demand likely to weaken throughout 2018,” said Bloomberg.
“A sudden abandonment of production limits and an increase of some 1.5 million barrels per day, previously cut, might not cause a sharp price slump this year, but would definitely do so in 2019.”
Bloomberg said Riyadh plans to reach 11 million barrels per day by 2023, up from less than 10 million now while Iraq and the UAE are working on expansions, and so will Iran.
“It will take discipline for members to slowly boost output to some intermediate target. More likely, there will be a rush for the exits,” said Bloomberg.
“OPEC and its allies don’t need an exit strategy, but rather a long-term framework to manage restrained production growth. They cannot afford another price slump.”
Courtesy of Bloomberg
Oil price speeds forcing OPEC’s hand
Citigroup Inc., Societe Generale SA, and JMorgan Chase & Co. predict OPEC may start loosening their oil cut intervention by June when they formally meet again.
Oil reserves surplus is diminishing rapidly and there are increasing signs of the dangers that high prices pose for OPEC, according to Bloomberg.
“Fortified by new investment, U.S. crude production is set to overtake both Saudi Arabia and Russia next year,” according to government forecasts.
With plenty of surplus oil still around, ministers from the UAE, Iraq and Kuwait insist there’s no need to change strategy today.
OPEC, Russia and Saudi joined forces in late 2016 against the threat posed by a boom in U.S. shale oil, which had flooded markets and sent prices crashing, and assembled a coalition of 24 nations that would cut their own production.
“U.S. production could top 11 million barrels a day next year, surpassing both Saudi and Russian output, according to U.S. government forecasts. That compares with an estimate of 9.3 million a day for 2017,” according to Bloomberg.
Courtesy of Bloomberg