Solidarity: key to a lasting solution

OPEC Bulletin Commentary March 2016

With the onset of spring in the northern hemisphere, one can already detect the inevitable change of mood in people as each day brings fresh reminders that the winter is fast drawing to a close. The days become lighter and longer, the weather milder and more settled with thoughts inevitably turning towards planning for the summer holidays. In keeping with this good feeling, there are also reasons to be optimistic about the future of the international oil market. And not before time. After many months of depression and uncertainty the sector could do with some encouraging news.

This has come in the form of data showing that the global economy is improving and forecast to remain fairly resilient, while, importantly, crude supplies, especially the high-cost oil from non-OPEC countries, are slated to markedly decline over the next two years. With demand expected to stay at acceptable levels, especially from the world’s top non-OECD importers, industry experts and analysts are confident prices, which fell below $30/barrel earlier this year after standing at over $100/b in 2014, will steadily climb to more reasonable levels. OPEC Secretary General, Abdalla Salem El-Badri, has also expressed confidence that the market will recover. He has repeatedly referred to the current downturn as “another cycle”.

The fact is, no one stands to gain from a sustained period of low crude oil prices. Each and every oil industry stakeholder is affected, either directly or indirectly, to varying degrees. The casualties are many and the costs high. For example, in such a low-price environment, expensive oil rigs became idle, associated infrastructure is shut down or dismantled, support services mothballed, whilst once thriving companies are forced into drastic retrenchment, leaving many thousands of valued employees redundant. And at the other end of the spectrum, these same firms have little choice other than to make serious cutbacks in investment in essential production capacity, threatening future security of supply for the consumers, in addition to price spikes.

“Investment is being cut tremendously,” El-Badri, told delegates at the CERAWeek conference in Houston in February. “This is really a seed for a very high oil price in the future,” he warned.

By now, everyone knows the reasons for today’s low oil prices. They are primarily because of excess crude supplies in the market that have come mostly as a result of the tight oil explosion in the United States. And, as always, speculators are playing their part in the volatility in trying to manipulate prices on the various world energy exchanges, exacerbating an already fragile situation.

The one positive in all this is demand, which remains reasonably strong, although lower than in 2015. However, recent figures show energy-hungry China and India both stepping up their crude oil imports, in China’s case to successive record levels.

But this brings the next problem. A lot of the extra oil being supplied around the world is not being consumed. Because of the low price, importers are buying up large volumes of crude while it is cheap and putting into whatever storage they can find. It has resulted in global inventories of crude standing at all-time record levels. In the OECD region alone, there is an excess of around 300 million barrels of crude in stocks. This is way above the considered norm. El-Badri has said that this represents a continuing and worrying trend that needs to be addressed if crude prices are to recover in an orderly fashion.

The good news is the oil producers — both OPEC and non-OPEC — are talking together about the current situation, particularly the oversupply and the stock overhang.

They plan to meet in the Qatari capital, Doha, in April to discuss taking joint action to freeze oil production to January levels.

El-Badri alluded to this in Houston, stating that OPEC and non-OPEC producers had held recent technical meetings to mull over action that would allow the market to rebalance itself. “This is a first step, to see what we can achieve … and if this is successful, we can maybe take other steps in the future,” he said.

These meetings represent a cautious, yet significant step and one that will be explored further at the Doha round of talks.

OPEC has long expounded the importance of OPEC and non-OPEC cooperation for helping to bring stability back to the market in times of need. But there are two sides to this coin and the Organization cannot do it alone.

As El-Badri has often repeated, OPEC wants to cooperate, it wants to find a solution to the current problems, and it is willing to “talk to anyone” to achieve its goal of securing an orderly and efficient oil market with fair and reasonable prices for all.

Let us hope then that solidarity, common sense, and understanding prevail and that it is not just the spring weather than turns out to be sunny in April.

OPEC Bulletin March 2016

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