'The Current Oil Market'

Speech delivered by HE Abdalla S. El-Badri, OPEC Secretary General, at Oman Energy Forum 2013, Muscat, Oman, 21 October 2013

Your Excellencies, Ladies and Gentlemen,
Good morning.

It is a pleasure to be here in Oman and to be in the company of His Excellency Mohammed bin Hamad Al Rumhy, Minister of Oil and Gas of Oman, as well as my dear friend, His Excellency Abdullah Bin Hamad Al-Attiyah.

I would also like to acknowledge Gulf Intelligence for the invitation to speak at this Oman Energy Forum.

The main focus of this speech will be the current oil market situation. However, I understand that there will be a question and answer session following this short speech and I am happy to try and answer any questions you may have on the medium- and long-terms, as well as the current situation. I look forward to our deliberations and discussions.

Allow me initially to say a few words on Oman.

Over the years, Oman has been an important part of the international oil and energy markets. In terms of oil, its current production stands at around 900,000 barrels a day and the country has plans to invest even more to help boost reserves and capacity further.

It is proving an excellent example of how you can get much more from natural resources by using technology for enhanced oil recovery.

Moreover, Oman has also seen increasing investments in the downstream, as well as in storage, trading and shipping, and it has major plans to expand its natural gas sector.

The country has decided to take some risks and invest considerable resources to expand its oil and gas capabilities. This is something OPEC welcomes. It is clear that Oman is now reaping the rewards from recent developments.

Given its location at the crossroads of the energy corridor that connects Africa, the Middle East and Asia, there is no doubt that Oman will remain an important player in the global energy market.

Turning to the current oil market, let me stress that over the past few years the market has not been directed solely by the fundamentals of supply, demand and stocks, as it has been in the past. There are many other factors at play, such as the role of oil as an asset class, speculation, the futures market and spot prices, and of course the current economic environment.

In looking at this past year, while some might suggest that it has been less volatile than those in the recent past, it has remained a testing time for the global oil industry.

In 2013, we have continued to see a number of uncertainties and challenges. These include the future of the global economy as it continues its recovery, geopolitical events and their potential and actual implications on the oil market, as well as some supply issues, particularly in the North Africa and the Middle East.

Despite these issues and others, however, there has been no shortage of oil in the market. There has been enough supply to meet demand. And we believe market fundamentals remain balanced today.

Nevertheless, as we approach the end of 2013 and head into next year we need to remain vigilant. There remain many concerns for the market to digest, and act upon.

The economy remains the major worry, particularly in the short- and medium-term.

In the US, we continue to see some economic recovery, with improvements in the labour market, the housing market and stronger numbers for manufacturing and services, as well as improved consumer confidence. And I am sure we are all happy to see the US Government step back from the brink of defaulting on its debt. We anticipate seeing stronger US growth in 2014, at 2.5%, than the 1.6% expected this year.

In Japan, while the country continues to enjoy government-led support measures, there remain challenges for the government in its ongoing recovery and fiscal consolidation efforts.

The Euro-zone continues to be a region of mixed messages. There has been some improvement in output and sentiment, but the labour market situation remains a major challenge, particularly in places like Greece, Spain, Portugal and others. However, as the economy is coming from very low levels of output, there is some expectation of a slight recovery later this year and into 2014.

In China, recent data suggests that the economy has slowed a little. The country’s economic growth for 2013 has slipped from a predicted 8 per cent at the start of the year, to 7.6 per cent today. Although I should stress that this figure is still clearly positive. India too has seen its predicted growth lowered, and this now stands at 5 per cent for this year. We hope that this slowdown is just a short-term issue, and not a long-term trend.

And in developing countries, in general, we have seen some concerns regarding the impact on their economies of the expectation of a reduced US monetary stimulus, which will affect the inflows of investment and accordingly reduce demand for their exports. However, we expect growth to remain fairly robust in the developing world.

There is clearly much to keep policymakers engaged as countries and regions look to stimulate and support economic recovery.

Overall the outlook for 2014 is better than for 2013. In OPEC’s Monthly Oil Market Report we see global GDP of 2.9 per cent in 2013, but this increases to 3.5 per cent the following year.

In terms of other challenges, I should reiterate the importance of eliminating excessive speculation.

I am sure everyone here can appreciate that we cannot avoid speculation and volatility altogether. It is a part of the market. However, it is essential that we look to mitigate extreme volatility and excessive speculation, which are detrimental.

Trading continues to be made on the perception of a supply shortage, rather than evidence of any actual or impending shortfall.

Even though this year – in terms of prices – we have generally witnessed prices move in the $100-$110 range; a range that is acceptable to producers and consumers alike. It is important that prices do not witness extremes – neither too high nor too low.

On the supply side, there have been some disruptions in a number of producing countries in the Middle East and North Africa, as well as in the North Sea.

These developments, however, have had minimal impact on the market. Supply has been able to meet demand. In addition, supply continues to increase with non-OPEC expected to rise by 1.1 million barrels a day in 2013, and 1.2 million barrels a day in 2014.

Non-OPEC supply increases are led by the US and its rising tight oil production. Let me stress here that this is a welcome development. It adds depth to global supply, aids market stability and provides further proof to consumers that the world is not running out of oil. We hear very little talk of ‘peak oil’ today.

However, while recent developments in the US have been transformative for its energy industry, we need to see how sustainable this type of production is in the longer term. For instance, tight oil wells in the first year witness steep decline rates. It means that operators need to ‘drill, drill, drill’ just to maintain production.

In terms of OPEC crude production, it is currently just over 30 million barrels a day. The Organization is making sure its consumer’s needs are met.

At the same time, spare capacity remains at comfortable levels. And we see these comfortable levels remaining for the foreseeable future.

From the perspective of stocks, we also see fairly robust numbers. Stock levels in the OECD remain relatively healthy, and there has also been a steady build up in commercial and strategic petroleum reserve stocks in non-OECD regions, such as China and India. And forward demand cover is currently 58.6 days, which is above the five-year average.

Given that world demand growth is forecast to increase by 800,000 barrels a day this year and 1 million barrels a day in 2014, there is clearly enough supply to meet rising demand.

Excellencies, ladies and gentlemen,

Allow me to reiterate some key messages concerning the current oil market situation.

There has been, and there remains, more than enough supply to meet demand. We also see this as the case for the rest of 2013 and into 2014.

Stock levels and OPEC spare capacity continue to support the future supply and demand outlook.

And the main uncertainty remains global economic growth, with the Euro-zone continuing to be the main area of concern.

Thank you for your attention. And I look forward to our follow-up discussions.