Opec’s oil production is at a record high, non-Opec output is rising, US production appears to have bottomed out, and oil demand growth is tepid at best. Throw in the dollar’s recent strength and it becomes clear why prices, which began October on a bullish note, are increasingly appearing bearish.
But against this backdrop, Opec has regained some of its lost relevance and the producer group’s decision in Vienna on 2 November on restraining output could decide the future course of oil prices.
The International Energy Agency has said that Opec’s plan to limit production will play a key role in speeding up the rebalancing of oil markets. Without Opec intervention, the market will remain oversupplied through the first half of next year, the Paris-based agency said in its October monthly report.
But challenges have emerged on several fronts since Opec announced a preliminary deal in late September to limit production to between 32.5 million barrels per day (b/d) and 33 million b/d. Opec produced 33.24 million b/d of crude in September, according to an S&P Global Platts survey.
An Opec technical meeting in Vienna at the end of October, including a day of discussions with non-Opec producers, failed to yield the desired results and drove prices lower.
Front-month ICE Brent futures settled at $48.30/b on 31 October and NYMEX WTI at $46.86/b, both down 5% from levels seen on 1 October.
Opec had hoped to emerge this weekend with enough parameters of its freeze agreement sorted out to gain the commitment of several non-Opec producers to join in reining in output. Instead, the meeting only served to expose the divisions within Opec, affirming doubts among sceptics that the organization would be able to credibly implement the freeze plan tentatively reached in Algiers in September.
And the six non-Opec producers—Azerbaijan, Brazil, Oman, Russia, Kazakhstan and Mexico—which attended the talks were left wanting, essentially telling the producer group to get its house in order before asking them to pledge adherence to a deal that does not exist.
The main obstacle has been the refusal of two of Opec’s biggest producers—Iran and Iraq—to restrict their growing output, putting the onus on Saudi Arabia to shoulder the bulk of any proposed cuts.
Iraq is insisting on a higher quota or an exemption from the freeze as it battles the Islamic State militant group, while Iran argues that it is entitled to produce more, having lost out while under sanctions.
Iraq has also been critical of Opec’s estimate of its production using secondary sources, which it says severely underestimates the country’s actual production—a point that will make it harder for Opec members to decide which base number to use when dividing up the new production levels and further complicate an already delicate situation.
Iraq told Opec that its production in September averaged a record 4.775 million b/d, up 153,000 b/d from August. However, Opec’s secondary sources pegged Iraq’s output last month at 4.455 million b/d, a difference of 320,000 b/d with the government’s figures.
The demand-supply outlook appears to have deteriorated. Overall global oil demand growth continues to slow down, dropping from a five-year high of 2.5 million b/d in Q3 2015 to a four-year low of 800,000 b/d in Q3 2016 due “to vanishing OECD growth and a marked deceleration in China”, according to the IEA.
There appears to be no let-up in supply. Opec crude output rose by 160,000 b/d to an all-time high of 33.64 million b/d in September as Iraq pumped at record rates and Libya reopened export terminals, the IEA said, adding that Saudi Arabia, Kuwait and the United Arab Emirates held supply at or near historic highs, while Iran was producing close to the pre-sanction level at 3.7 million b/d.
Non-Opec production was up nearly 0.5 million b/d on higher Russian and Kazakh output.
US crude production appears to have bottomed out. Output fell to 8.428 million b/d in the week ended 1 July, ranging since between 8.445 million b/d and 8.597 million b/d, according to estimates by the US Energy Information Administration (EIA).
The EIA last month said that US crude production should average 8.6 million b/d next year, an upward revision of 100,000 b/d from its previous forecast. In 2016, US output is expected to average 8.7 million b/d, compared with 9.4 million b/d in 2015, EIA said.
While Opec takes the limelight, one cannot forget the upcoming US election, which could impact the dollar and in turn oil prices.
A key factor capping oil prices in the past month or so has been the strength in the dollar index, driven by the belief that US economic conditions have become robust enough to support an interest rate hike by the Federal Reserve later this year. A stronger dollar makes fuel and crude imports more expensive for holders of other currencies, putting downward pressure on oil prices.
Mriganka Jaipuriyar is associate editorial director, Asia & Middle East Oil News & Analysis, S&P Global Platts.