Speech by OPEC Secretary General

Delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General, at the 18th International Oil Summit, Hôtel Le Méridien Etoile, 27 April 2017, Paris, France.

Excellencies, ladies and gentlemen,

It is a great pleasure to return to Paris for this 18th edition of the International Oil Summit.  I would like to thank the organizers of this prestigious event for the invitation, and to the Chair of the session, Mr. Claude Mandil, for his introductory remarks.  Mr. Mandil was actually Executive Director of the IEA when I was Acting for the OPEC Secretary General back in 2006.  It is a pleasure to be on a panel with you again.

I would also like to thank my colleagues here from the International Energy Forum (IEF) and the International Energy Agency (IEA) who ensure that this session has an impressive line-up of speakers.

My great friend, HE Dr. Sun Xiansheng, the Secretary General of the IEF, actually assumed his position at the IEF on the same day I took up my position as OPEC Secretary General, back on August 1, 2016.  I have seen firsthand Dr. Sun’s energy, commitment and dedication to advancing and strengthening the producer-consumer dialogue.  He should be lauded for the initiatives he has already taken to further enhance the role of the IEF, including the last OPEC-IEA-IEF Energy Outlooks Symposium held in Riyadh, the Kingdom of Saudi Arabia, which was a great success.

And from the IEA, there is Mr. Keisuke Sadamori, the Director of the Energy Markets and Security Division.  My colleagues at OPEC speak very highly of the work you have been undertaking at the IEA, and I look forward to engaging with you on this panel.

[SLIDE 2 – Disclaimer]
Excellencies, ladies and gentlemen,

I have been asked to share with you today, OPEC’s views on the current oil market conditions.  In this regard, I feel that it is important to initially take stock as to the current state of the oil market.

This includes a brief overview of the historic decisions taken by OPEC and non-OPEC last year, what has happened to the market since the decisions were agreed, where we are today in terms of the rebalancing process, and perhaps the trickiest question of all: what is potentially ahead of us?

In the second half of last year, OPEC embarked on the most extensive consultations among OPEC Member Countries and between OPEC and non-OPEC producing nations, as well as with consumers and the broader international community about the strategic urgency of restoring sustainable oil market stability in a collective manner.

These extensive consultations, both formal and informal, across various global capitals, were unparalleled in the history of OPEC.

There was a consensus that stability on a sustainable basis had eluded the industry since the summer of 2014, to the detriment of all industry stakeholders.

It is easy to appreciate why there was a consensus.  The effects of the price crash that began in mid-2014 were unprecedented.

Between June 2014 and January 2016 the OPEC Reference Basket price fell by an extraordinary 80%.  It is the largest percentage fall in the six episodes of sharp price declines we have observed over the past four decades.

It also led to thousands upon thousands of jobs being lost, many projects cancelled or deferred, investments frozen or discontinued, with a dramatic contraction in investments in both 2015 and 2016, and many companies seeing great financial and operational stresses.

It was clear to everyone we spoke to that the oil industry could not continue along this path.  Moreover, it was not only impacting short-term developments, but the medium- and long-term outlooks too, given the fact that the world will need more oil in the decades ahead.  The bleeding had to be stopped.

At this juncture, allow me to recall the atmosphere at this Summit back on 21 April 2016.  In conversations with colleagues that were in attendance I heard expressions of bearish sentiment, a sense of foreboding about the industry’s near-term future, and little talk of industry expansion and investment.  The prevalent feeling was gloomy and downbeat.

There was also no clear direction, despite the efforts made at the Doha-1 meeting in February 2016, between Qatar, Saudi Arabia, Venezuela and Russia, and the Doha-2 meeting in April 2016, with around 20 OPEC and non-OPEC producers present, as to how the industry might overcome the downturn that had begun in mid-2014, and in turn, rebalance supply and demand.  Producers, both OPEC and non-OPEC, had lost their compass and direction!

Total OECD commercial oil stocks in April 2016 were around 350 mb above the five-year average, and expectations were for them to continue to rise.  They reached 380 mb in July 2016.  WTI and Brent combined net-long positions were at 620,000 contracts in mid-April, with a pessimistic market outlook among traders for the coming months.  WTI and Brent combined net-long positions fell to below 400,000 contracts by mid-August.  And the average ICE Brent price in the first four months of 2016 was around $30/b, compared to an average so far in 2017 of $52/b.

I think it is important to appreciate what fundamentals might look like today without the decisions taken last year being effectively put into action.  The market would no doubt look very different – more unstable, more volatile, and with far less optimism, with continued negative impacts on all stakeholders.

The extensive consultations that began in August 2016 were undertaken with commitment, great diligence and rare courage that facilitated flexibility, accommodation and compromise among the respective parties.  These eventually led to the landmark decisions taken at the 170th (Extraordinary) Meeting of the OPEC Conference in Algiers, on September 28, 2016, the 171st Ministerial Conference in Vienna on November 30, 2016, and the Declaration of Cooperation between OPEC and non-OPEC producers in Vienna on December 10, 2016.

The decisions meant that for the first time in the history of the industry, 13 OPEC nations and 11 non-OPEC participating countries came together as strategic stakeholders, to help rescue and stabilize the global oil industry – one that has been vital to the development of modern civilization.

The voluntary production adjustments of the 24 producing nations were focused on the urgent need to stimulate the acceleration of the drawdown of the stock overhang, bring the market rebalancing forward and ensure that much needed confidence and investments return to the industry.

Following these landmark decisions, it was evident that market optimism began to improve.

OPEC’s watershed decision in Algiers to agree on a production ceiling of 32.5 to 33 mb/d, the first production adjustment since the ‘Oran Decision’ of 2008, saw an immediate return of positive sentiment, albeit with some cautious optimism. There was a rise in net long-positions and a narrowing of the contango.

The timely decision in Algiers on 28 September 2016, in the spirit of collectiveness and flexibility, with three Member Countries accorded special circumstances, also extended the hand of unity to non-OPEC producers to broaden the global platform of voluntary production adjustments.  It was vintage OPEC at work!

Market optimism advanced again following OPEC’s decision on November 30.  This can be observed by the fact that WTI and Brent combined net-long positions increased from close to 500,000 contracts on November 29, 2016, to 763,000 on January 3, 2017.

This sentiment further improved in the early part of 2017, particularly following the high level of conformity to the voluntary production adjustments seen in January.  For this month, OPEC and non-OPEC nations achieved a conformity level of 86%, which certainly seemed to surprise the market to the upside.  WTI and Brent combined net-long positions reach 921,000 contracts on February 21, an additional rise of 21% from January 3.

It was a period of lower volatility, and more stability in oil prices.

However, despite the expectation of improved levels of conformity in February, which proved to be true, with overall conformity at 94%, we saw a turn in market sentiment in early March, with financial players significantly reducing their net-long positions.

It is important to stress that this development was not totally unexpected.  The first quarter of every year has a number of seasonal trends that can soften the market.

The first quarter is a period when significant levels or refinery throughput in the US is often shut-in.  In January and February this year, 1 mb/d of throughput was shut down for maintenance.  For these two months, this equates to approximately 60 million barrels.

On top of this, in previous months we have also seen rising production from a number of non-OPEC nations, particularly in the US from tight oil, reflecting expectations for much greater quantities to come from non-OPEC in 2017.

For example, in the January 2017 OPEC Monthly Oil Market Report, non-OPEC supply was anticipated to grow by 120,000 b/d in 2017.  In the April report, this number had risen to 580,000 b/d, driven mainly by expectations for rising growth in the US, as well as in Canada and Brazil.

In the US alone, expectations for 2017 were for a decline of 150,000 b/d back in the November 2016 report, while in the April report it is now estimated to grow by 540,000 b/d.

In addition, it is important to remember that the fourth quarter of 2016 was a period of significantly rising supplies that were working their way through the market in the early part of 2017Non-OPEC increased its production by around 1.8 mb/d from September to November 2016, and over the same period, OPEC increased its production by about 500,000 b/d.  This huge increase of 2.3 mb/d needs to be set against a global demand increase of just 200,000 b/d in the fourth quarter of 2016, compared to the third quarter.

However, in recent weeks we have seen positive sentiment return, driven by expectations for further improvement in OPEC and non-OPEC conformity, which ended up at 98% in March, and signs that the market rebalancing is taking place.

Total OECD commercial oil stocks in March fell by 23 mb, the second consecutive monthly drop.  The total level is 275 mb above the latest five-year average, compared to 314 mb in February, and 356 mb in the same month in 2016.

It should be noted that across the first quarter of 2017, stocks built by 26 mb, which is much less than the seasonal average of 36 mb, even though refinery maintenance globally was much heavier.  It is evident that the global inventory overhang of crude and oil products onshore is declining.

Outside of the US, we believe the global trend of destocking is broadly on track.  Moreover, we are also seeing numbers from industry stating that crude in floating storage has fallen by over 40 mb since the beginning of the year.

The US has evidently not been reflective of the rest of the world, given rising production there in the first quarter of 2017, but even here the market has now witnessed three consecutive weekly crude stock draws as refinery utilization has risen.

The improving sentiment was seen in a rise in WTI and Brent combined net-long positions, which reached over 751,000 contracts on April 18, from 670,000 on April 4.

Another encouraging sign is the rise in energy investments in 2017, which are expected to increase by 7%, with numbers in the US of around $20 billion seen for the first quarter of 2017.  This is a significant improvement over last year, when the recurrent investment buzz words were ‘cut backs’ and ‘freezes’.

These are all signs of a renewed sense of positive momentum and improving stability in the global oil market.

We need to appreciate that the market rebalancing was never going to occur in a linear fashion.  There are too many factors at play.

Nonetheless, we are heading in the right direction.  Slowly, steadily, but surely we are seeing light at the end of the tunnel.

Looking ahead, the general expectations for demand growth for crude and oil products in the coming months remain bullish, supported by anticipated firm economic performance across the world, as highlighted in the latest IMF World Economic Outlook, and the expected increase in demand for gasoline over the driving season, mainly in North America and Asia.

Additionally, the return of refineries from seasonal maintenance, together with the high conformity observed in the OPEC and non-OPEC voluntary production adjustments, should enhance market stability and reduce volatility.

For OPEC, the focus remains on conformity, which is being analyzed and monitored through a Joint Ministerial Monitoring Committee, the JMMC, and a supporting Joint Technical Committee, the JTC.  These are vital for the transparency required to implement these decisions in a full and timely manner, on the core principles of equity and fairness.

We remain confident that all 24 participating countries remain steadfast in honouring their commitments to individually achieve the 100 per cent level.  This is our firm goal.

The importance of fast tracking the rebalancing process, and returning market stability, is also vital to the medium- to long-term oil, and the necessary investments required for the world’s growing oil and energy future.

In the tenth edition of our World Oil Outlook, launched last November, oil demand is expected to reach over 109 million barrels of oil a day by 2040, an increase of over 16 million barrels a day from 2015 levels.  This demand growth is driven by developing countries and an expanding transportation sector, with more than one-third of the total increase expected in the road transportation sector, as well as significant growth in petrochemicals.

Moreover, as both OPEC and the International Energy Agency agree, there are no expectations for an oil demand peak in the foreseeable future.  Oil will clearly remain a fuel of choice in the coming decades.

This expansion in demand will obviously require significant investments in new barrels and to accommodate for decline rates from existing fields.  Overall, we see oil-related investment requirements of around $10 trillion over the period to 2040.

The industry needs timely, adequate and sustainable investment to guarantee security of supply to the global community.

[SLIDE 10]
Finally, I would like to respond to one of the pertinent questions posed by the organisers of this conference, and one that is perhaps apt to end on:  What lessons have we learned from the 2014-2016 price collapse?

Although the jury is still out, we do feel it is appropriate to provide some pointers.

  • The consequences of the decision of oil producers to abdicate their traditional responsibilities – related to stability and balance – to the vagaries of the market back in November 2014 have been evident for all to see.  There is once again widespread recognition that on occasions the market needs to be complemented, in the interests of all stakeholders.  And this is not only confined to oil.
  • The market saw the largest percentage price fall in the six episodes of sharp price declines we have observed over the past four decades.  The depth and duration of the supply-side led downturn was alarming, and so were the impacts for all stakeholders.
  • OPEC producers are anticipated to forego revenue losses of more than $1 trillion, the industry has seen a sharp two-year contraction in upstream investments of more than $450 billion, in many consuming countries it has led to deflationary pressures, and as the IMF has highlighted, the global economy overall has seen no net positive benefit.
  • The magnitude of these effects has seen growing calls from both producers and consumers to bring forward the market rebalancing, return stability to the market, and ensure the necessary industry investments take place, in a timely fashion.
  • The broad global platform of 24 producing nations from OPEC and non-OPEC initiated through the ‘Declaration of Cooperation’ is unparalleled in the history of the oil industry.  Given the nature of the downturn, a collective and concerted effort was required.  No-one could have acted alone.
  • Looking ahead, as the ‘Declaration of Cooperation’ underlines, it is vital that we evolve a framework of permanent and sustained cooperation between all participating nations, given the industry’s growing complexity and its inter-connected nature.
  • And finally, while it is evident the market rebalancing is now moving forward, and some investments – specifically short-cycle – are returning, it is essential we do not take our eye off our desired goals.  We need to see the global stock overhang move closer to its five-year average.  We need to see the return of more long-cycle investments, the industry’s baseload.  And we need to ensure sustainable stability in the years and decades ahead. 

[Slide 11]
With that, I thank you for your attention.

Speech slides

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HE Mohammad Sanusi Barkindo, OPEC Secretary General, speaks at the International Oil Summit in Paris, France

HE Mohammad Sanusi Barkindo, OPEC Secretary General, speaks at the International Oil Summit in Paris, France

(l-r) Mr. Keisuke Sadamori, Director, Energy Markets & Security, IEA; HE Dr. Sun Xiansheng, Secretary General, IEF; Mr. Claude Mandil, former Executive Director, IEA; and HE Mohammad Sanusi Barkindo, OPEC Secretary General

(l-r) Mr. Keisuke Sadamori, Director, Energy Markets & Security, IEA; HE Dr. Sun Xiansheng, Secretary General, IEF; Mr. Claude Mandil, former Executive Director, IEA; and HE Mohammad Sanusi Barkindo, OPEC Secretary General

HE Barkindo, OPEC Secretary General, speaks to the media in Paris

HE Barkindo, OPEC Secretary General, speaks to the media in Paris