‘Reflections on Recent Market Challenges’

Dinner Address delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General, at the Oxford Energy Seminar, Oxford University, 11 September 2017, UK.

Ladies and gentlemen,

It is a great pleasure to be here this evening, in front of such a learned audience, and of course, in a place of such great learning.  It is the oldest university in the English-speaking world; a place renowned for its great scholars, its stimulating intellectual debate and its teaching and research that has produced ideas and visions that have greatly impacted the world we live in.

Of course, as I am sure we all appreciate, the learning process we face as human beings does not end at university.  It is never-ending.  One of the many challenges we face as we make our way along this path called ‘life’ is making sure we learn to respond with agility, flexibility and understanding to the changing circumstances of our lives.

Although we all try to have happy, healthy, and satisfying lives, we also know that, at any moment, life can present us with difficulties, situations, and surprises that could not be foreseen.  We then are forced to adapt – to ‘roll with the punches’, so to speak – and thus we acquire strength and resilience.

The learning process I have just described not only has to do with our personal lives, but with other areas of human activity too – from the cultural to the social, from the political to the economic.  It also holds quite true for the energy and oil industry, and those areas in which many of us work.

Lest you worry that I am going to spend your dinner hour waxing philosophically, I assure you that I am here to speak to you about oil price cycles and recent market challenges.  I hasten to add, however, that there are few other places where a consideration of life’s deeper questions would be as welcome as here at Oxford!

I think it is appropriate to recall for a moment our late friend and colleague Robert Mabro, learned founder of the Oxford Institute for Energy Studies.  It was through his pioneering work and determination that the Institute was started, and it his spirit that continues to inspire the discussions that have been central to this Seminar since it began in 1979.  This year is the Seminar’s 39th edition.  I fondly recall my first visit to this Seminar back in 1986 and I can honestly say that it has had a positive and lasting impact.

Robert Mabro, who very sadly passed away last year, was widely respected for his vision, for his deep learning, and for his wit.  He was an influence on many of us, including my humble self.

I met with him on many occasions to brainstorm ideas and to garner advice on my career.  He was always friendly and accommodating, open-minded to ideas that might conflict with his own, and willing to offer guidance, both personally and in terms of his views on the global energy landscape.

In his many writings and talks, Mabro sought to provide a view of the oil market in the 21st century.  It is one that many of us have come to recognize today.  In fact, his understanding of the central role that oil would have in both industrialised and developing countries was in advance of his peers.  In many ways, he was a visionary.

In a 2005 book, which Mabro edited on behalf of OPEC called ‘Oil in the 21st Century’, he spoke eloquently about some of the future challenges that would face the oil market.  He also supported the ongoing idea of developing a dialogue ‘between the various parties of the energy scene’. 

He was a very early advocate of the producer-consumer and producer-producer dialogue, following the oil price crash in 1986 and his excellent work and analysis on the genesis of this dramatic event.  I am pleased to say that at OPEC, we have taken this lesson on dialogue to heart, as recent developments have demonstrated.

As the 39th edition of this Seminar proceeds with discussions and deliberations, let us remember the important contributions of the late Robert Mabro.  We should look to recall the impetus he gave to this annual Seminar, and seek to emulate the vigour and spirit with which he always carried out his work.

One of the themes that Mabro and other scholars have sought to understand is the role and effects of oil price cycles.  Often when people talk of price cycles, they begin with caveats.  Price cycles – and stories of violent boom and bust – raise the spectre of long, slow-moving lines at petrol stations.  They conjure up scenes of a world of harsh scarcity, with people searching for oil as they do in some dystopian movies.  And they can also evoke images of a world awash in cheap oil, with idle pumps and rigs.

The reality is that price cycles have always been part of the market.  They are part of its evolving nature; and as the market dynamics and structures change, so do the characteristics of those price cycles.

At OPEC, we have conducted research into price cycles and have identified six major price cycles since the early 1970s.  For each of these cycles, we have also looked into the monthly periods of losses and gains using the ‘real price’ value of the OPEC Reference Basket.

This has been a rewarding exercise for us, as it has revealed some interesting similarities among the cycles, as well as some divergences.

For instance, sometimes it has been the economy driving the price cycle, thus demand has been the primary driver of prices, helping to push them up.  Other times, it has been supply, such as with the current cycle, which has served as the primary or fundamental factor.  At other times, a combination of supply and demand factors has driven prices.

Moreover, we also need to recognize that in recent times, non-fundamental factors, such as speculative financial activities, have been a significant factor impacting prices.

However, despite some existing parallels with previous cycles, the magnitude of the price drop in the current cycle is the highest of all cycles in real terms.  In addition, the recent drop in oil prices has been considerably sharper than the decline in prices for other commodities – which is in stark contrast to, for example, the oil price collapse of 1985-1986 when all commodity prices saw a steep decline.

Regardless of what the exact nature of the drivers is, in all cases extreme prices created boom and bust cycles.  These have often had quite negative implications and have contributed to the creation of extremely volatile price environments, which is not in the interest of either producers or consumers.

We need to remember that low oil prices are bad for producers today and lead to situations that are bad for consumers tomorrow.  And high oil prices are bad for consumers today and lead to situations that are bad for producers tomorrow.

In terms of the current price cycle, the OPEC Reference Basket price fell by an extraordinary 80% between June 2014 and January 2016.

Many producers felt that the circumstances surrounding the recent price cycle had completely overtaken their day-to-day work.  It also choked off investments, with exploration and production spending falling by a massive 27% in both 2015 and 2016. The recent price crash led to nearly one trillion dollars in investments being frozen or discontinued, and many thousands of jobs were lost.

Moreover, it was also a period that saw major stock builds, with the OECD stock overhang increasing to a level of 380 million barrels above the five-year average at the end of July 2016.

The seriousness of these developments led to OPEC embarking on extensive consultations among OPEC Member Countries and between OPEC and non-OPEC producing nations, which I should stress are ongoing and remain extremely positive, to build consensus about the strategic urgency of rebalancing the global oil market in a collective manner.

These eventually led to the historic production adjustment decisions reached by OPEC and participating non-OPEC producers at the end of 2016 and then extended in May 2017, for a further period of nine months till the end of March 2018.  This has been a major commitment from 24 producing countries as we look to see the return of sustainable market stability.

There was then, and continues to be now, global recognition that without such adjustments, the market would have experienced further extreme volatility, which would have had far-reaching negative consequences for producers, consumers, investors, the industry, and the global economy at large.

It is clear that the rebalancing process is underway, supported by the high conformity levels of  OPEC Member Countries and participating non-OPEC countries to the production adjustments in the landmark ‘Declaration of Cooperation’.  Destocking, both onshore and offshore, is clearly evident.

The most recent data for July 2017 now shows OECD commercial oil inventories around 195 million barrels above the five-year average, down 145 million barrels from the close to 340 million barrels seen at the beginning of 2017.

Floating storage has also been on a declining trend since June, supported by a narrowing contango.  In fact, Brent has recently flipped into backwardation.  As a whole, industry data for 2017 suggest that crude in floating storage has fallen by more than 30 million barrels since the beginning of the year.

Even in the US, the market saw nine consecutive weeks of crude oil stock draws across the months of July and August. This amounted to a total drawdown of over 51 million barrels.

It should be noted that the final week of August actually saw a US crude oil stock build of around 4.5 million barrels, although this was to be expected following the refinery outages after the devastating Hurricane Harvey hit Texas and Louisiana.

Although there has been a relatively quick recovery in shut-in crude oil production, both offshore and onshore, the havoc wrought by Harvey, as well as that of Hurricane Irma, will undoubtedly continue to have implications far beyond the US Gulf Coast for many months. For example, in terms of refinery runs, trade flows, crude and product pricing and short-term oil demand.

However, the manifold effects, and the varying speed with which recovery of facilities in the region will take place, make it difficult to extrapolate just how its impact will play out on the markets.

Alongside this positive conformity story and the ongoing destocking process, another optimistic indicator going forward is global oil demand growth. It is estimated to increase by close to 2 million barrels a day from the first to the second half of this year.  Undoubtedly this boost in demand will contribute to further reductions in commercial oil inventories.

It is also important to note that we have recently seen a slight deceleration in non-OPEC supply growth, particularly in some tight oil basins as evidenced recently by falling rig counts.

Ladies and gentlemen,

I should stress that there does remain a significant concern looking ahead.  This is specifically in regard to the level of investments being made.

While investments are expected to pick up slightly this year and in 2018, it is clear that this is not anywhere close to past levels and it is more evident in short-cycle, rather than long-cycle projects, which are the industry’s baseload.  Additionally, we should remember that the actual volume of conventional oil discovered across the globe has halved over the past four years, compared to the previous four-year period.

As we have all learned from previous price cycles, such pronounced and long-term declines in investments are a serious threat to future supply.  But given our projected future demand for oil, the world simply cannot afford a supply crunch.  Thus, we need to continue to make every effort to make sure that future supply is not jeopardized.  Recognizing and respecting the link between long-term security of supply and short-term conditions is critical.  In other words, we all need to work hard for sustainable market stability.

In fact, OPEC has consistently pointed to the interrelatedness of these two dimensions, and has reminded other producers that addressing them requires close collaboration on the part of both producers and consumers.

The only way to strive for this market stability is to do so collaboratively, in consultation with other energy stakeholders.  We have done so – and, as part of this, we continue to emphasize the need for better information about energy and environmental policies in consuming countries, as well as of energy trends worldwide.  Such issues are of common concern and, as such, cannot be pursued in isolation.  They require common and collective responses.

As we discuss these and other issues, perhaps we will find interesting insights to derive from the current situation.  But we should remember that it is not the actual finding of a permanent solution to any one challenge that makes us successful.

Rather, it is the way we act and respond to each and every new challenge, and the way we work together and collaborate, that will really determine whether we have learned anything from the late Robert Mabro’s vast learning, collaborative nature and generous spirit.

And of course this spirit continues with those that carry on his work through this Seminar: Mr. Nader Sultan, Professor Louise Fawcett, Dr. Bassam Fattouh, and our host for the evening, Professor Roger Ainsworth, to name just a few.

Thank you.

HE Mohammad Sanusi Barkindo, OPEC Secretary General (c), with Mr. Nader Sultan, Director of the Oxford Energy Seminar (r), and Professor Roger Ainsworth, Master of St Catherine's College

HE Mohammad Sanusi Barkindo, OPEC Secretary General (c), with Mr. Nader Sultan, Director of the Oxford Energy Seminar (r), and Professor Roger Ainsworth, Master of St Catherine's College