OPEC and Russia are thinking about how to follow up their production-limitation agreement when the time comes, while the extraction of shale oils is increasing fast in the United States. OPEC’s agreement with non-OPEC countries (in other words, mainly Russia) is set to expire at the end of 2018. Its implementation and results are to be examined in June. However, the Kremlin stated on February 14 that, during a phone call between King Salman of Saudi Arabia and Russian President Vladimir Putin, the two Heads of State had “expressed readiness to expand fruitful coordination on world hydrocarbon markets”. Russian Energy Minister Alexander Novak had said a few days earlier that an exit from the agreement with OPEC should be gradual and that “it could take three, four, five months or maybe just two”. He added that “everyone supports this scenario” of a gradual exit. “Our goal was to take surplus oil away from the market. At the moment, we see that this goal is achieved by two thirds”, said Novak, adding that “we cannot rule out that the target level for global oil reserves may be reached by the end of 2018”. According to the Iraqi Oil Minister, any talk of an exit will have to wait until December 2018.
Speaking at a joint press conference with Novak on February 15, Saudi Energy Minister Khaled Al-Falih said that the parameters of any future cooperation have yet to be defined. “It’s not binary, but I don’t think it’s appropriate to assume [that] Russia and Saudi Arabia will take full swing of what is required in the future” to balance markets. Falih added that “we need to make sure that we look at non-OECD inventories, floating storage, investor behavior and numbers from respectable agencies”. The UAE’s Energy Minister, Suhail Al-Mazrouei, who is also the incumbent President of OPEC, said that the goal of eliminating surplus oil stocks is well on its way to being reached. “What concerns us today is the level of inventories that we need [in order] to achieve the five-year average, and I see the markets going in that direction and achieving balance”, Mazrouei said on February 13. “How long it will take depends on how long the increase in shale production will take”, he added. However, rising shale-oil production in the United States is no cause for concern, said the Emirati Minister: “Considering all factors, I don’t think that it will be a huge distorter of the market”.
In the latest edition of its monthly report on the oil market, the IEA noted “the extraordinarily rapid fall in OECD oil stocks. A year ago, they were 264 MMb above the five-year average, and now they are only 52 MMb in excess of it”. As it is, the success of the production agreement between OPEC and non-OPEC producers “might be close at hand”, says the IEA, without however ruling out a trend reversal. The main factor to watch is US oil production, it warns.
As it is, the agency is forecasting an increase in non-OPEC oil production in 2018 which may be even stronger than the anticipated rise in world oil demand. The former is set to rise by an estimated 1.7 million b/d, while the latter is expected to grow by only 1.4 million b/d. As it happens, oil production in the “Americas” (according to the IEA’s categorization) is predicted to increase by 1.7 million b/d this year. If these forecasts prove to be true, the call for OPEC crude required to balance the international oil market in 2018 will only be 32.3 million b/d on average. However, the OPEC countries produced much more than this in January 2018: 33 million b/d. In other words, if they don’t reduce their production, there is a risk of a surplus oil supply and thus … an increase in stocks! This would probably lead to lower prices. Faced with such prospects, it may seem surprising that OPEC and Russia are already considering an exit from their production agreement, even if they haven’t yet set any deadlines. Unless the desired effect is actually to curb the enthusiasm of US shale-oil producers by holding out the prospect of an excess supply which would lower prices. But, beware, the IEA warns, US producers have sharply reduced their costs and “are enjoying a second wave of growth” that the agency can only qualify as ”extraordinary”.