OPEC+ strategy under severe pressure due to geopolitical and economic unrest

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OPEC+ strategy under severe pressure due to geopolitical and economic unrest

By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk

The continuing OPEC+ production cut strategy seems to be still holding, but severe pressure is building up testing the resolve of leading members Saudi Arabia, Russia and the UAE to continue the current agreement.

Without any doubt, OPEC+ has not yet brought the expected benefits, as oil prices have been declining, way below the targets set. At the same time, international instability, geopolitical and economic unrest have depressed expectations for the upcoming months.

The US-China trade war is still seen by most analysts as the main factor for the current lower oil prices. The latter is however not based on real figures, as demand has still been growing, and OPEC+?s export volumes have even increased lately.

At the same time, the US-Iran conflict and US sanctions on Venezuela did not bring the expected rewards, as the removal of millions of barrels per day (bpd) of crude oil had minimal effect too. The market seems to be in a flux, in which market fundamentals are not leading, but to the contrary, the emotions and assessments of financial analysts.

Looking at the real picture, OPEC+ was able to continue its set strategy of removing millions of barrels of oil from the market. The latter was set in to remove part of the high levels of oil storage volumes reported mainly in the US.

The instigators of the OPEC+ production cut agreement, Saudi Arabia and Russia, are still fully supporting it.

Saudi Arabia is the main factor in the 130 percent compliance rate as it has been cutting production above levels agreed. Without the kingdom, compliance would be low.

Moscow has in turn reiterated that it will keep backing it up ?whatever it takes?.

The Russian ministry of energy said this week that Russia will fully comply with its obligations under the OPEC+ agreement in September, following the rise of August output above the target under the deal.

Russia’s August oil production cut level was 143,000 bpd compared to October 2018. However, at the end of August, the cut was at a level of 299,000 bpd, the ministry stated.

September 2019 will be of importance to the OPEC+ agreement, as August figures have questioned the latter. The last day?s data has shown that OPEC exports in August increased to a four-month high.

Based on assessments, OPEC members like Saudi Arabia, UAE, Iraq, Iran and Kuwait, which account for almost 75 percent of total OPEC production, have exported 15.73 million bpd of crude oil in August.

OPEC?s August production is set at 29.61 million bpd with a 736,000 barrels bpd increase, mainly coming from Saudi Arabia and UAE, 300,000 bpd each, Iraq up by 150,000 bpd. In addition, Iranian exports have also showed an increase of 65,000 bpd.

Not only exports have shown an increase, but also production in Saudi Arabia, Nigeria and Iraq, bringing OPEC production to 29.99 million bpd.

The market still expects that non-OPEC oil production, mainly US shale, will increase substantially. The latter has been the nightmare scenario for OPEC+ since years, and still continues its progress.

However, some negative news has emerged last week from the North American plains. Overall onshore rig counts are almost flat, or sometimes negative, while production per well is under severe pressure.

Looking at the financials, onshore drillers are being hit, as most independent smaller parties are not able to pay up their debts. At the same time, Canada, the silent American giant, is looking at a flight of capital and interest of internationals in its oil and gas projects. Possible meltdown in some places is to be expected.

Market fundamentals are still looking bullish, but geopolitics and internal stability could cause havoc to OPEC+ in future. The ongoing US-China trade war is causing concerns worldwide, not only about possible demand for oil and gas but also for global economic growth and trade. Until now, the effects have been minimal to say the least.

China?s demand for hydrocarbons has not been lacking, but to the contrary. Some could state that the clash with Washington has been a boon for OPEC+ as they are reaping the rewards of China?s substitution of US shale oil by OPEC crudes.

Demand for oil could also take a dent if a No-Deal Brexit still becomes reality. The total chaos in UK politics, combined with possible negative economic and financial repercussions for the EU, does not bode well for European oil demand in the coming months.

Internal OPEC issues should however be looked upon much more effectively. Most attention has gone to Riyadh-Moscow?s willingness to cooperate or the continuing clash between Tehran-Riyadh. Both have their effects on stability within the oil cartel.

Potentially, the total reshuffle of Saudi Arabia?s energy sector is more worrying. At the time that the world is watching the implementation of Aramco IPO without former energy minister Khalid Al-Falih at the steering wheels, it is clear that changes will be coming soon.

The latter IPO is and will be part of Saudi?s OPEC production cut strategy in the future. Higher crude prices are needed; some even say $80 per barrel, to make the IPO a success.

With Crown Prince Mohammed bin Salman now taking full control of Saudi?s oil future, OPEC will need to deal with geopolitical and Saudi royal assessments too.

The first assessments will be hitting the media in the coming days, as we are heading to the Sep. 12 OPEC Joint Ministerial Monitoring Meeting (JMMC) in Abu Dhabi, where a select group of OPEC members will discuss the cartel?s oil production quota compliance.

The outcome could be a first sign where the market is expected to be heading. Until now, risks are very high that all could fall apart. OPEC?s quest to stabilize the market partly succeeded, while the world has become less stable, and OPEC?s stability is also very fragile.

By Dr. Cyril Widdershoven for argaam.com