OPEC Decision in Review: Conclusions and Prospects

The OPEC Decision Thursday evening was exactly what the market expected. Prolongation of cuts of 1.8 million barrels per day since October 2016 (including Russia and other external partners). The current duration until March 2018 will be extended until the end of December 2018. At $ 57.60, the WTI price on friday was exactly where it was Thursday afternoon before the beginning of the OPEC meeting.

Saudi Arabia’s Oil minister Al Falih Thursday at the OPEC Press Conference in Vienna. Photo: OPEC

This shows that the market ultimately received exactly what it expected. As always, too many participants are already talking about the result in the run-up to the event, which is then voted on in the days and weeks before the meeting between individual participants. And what do we learn from yesterday’s decision? Important as always are the detailed statements “surrounding it”.

The gray eminence of OPEC, Saudi Arabia’s oil minister Al Falih, who was the main character on the podium in front of the press next to Russia’s Energy Minister Novak, was the central figure of the day (as usual). Most importantly, you can probably evaluate his statement, which he made on demand of a journalist question (about the rising fracking production in the US). The Frackers could calmly and gladly compensate the declining production of OPEC. However, according to Al Falih, they will not even be able to meet the rising demand on their own in the next few years.

In the wording, Al-Falih very relaxed said that global demand is rising by 1.5 million barrels a day “year after year”. The Frackers could not satisfy this demand alone. Al-Falih pointed to global population growth. This was already a topic in various studies by IEA and other organizations. Despite the massive expansion of renewable energies and alternative propulsion systems, the population will explode globally to such an extent that OPEC is confident that the demand for oil will increase significantly year on year.

And that’s why you can see the situation relatively relaxed. Time is working for the Gulf States, so you could express his thoughts. Despite the increasing amount of fracking, there is still more than enough space on the supply side for OPEC. The demand is rising so fast (year after year) that the Americans can not do it alone – the simple logic behind it. And yes, Al Falih could not resist the remark, which is correct in content – hardly anyone had expected that the OPEC deal wouldn´t work.

Even we Journalists had clear doubts (which have not disappeared). Because the Frackers continue to increase their volume of production, the US is now very close to reaching the 10 million barrels per day. As we said: OPEC’s bill comes up when global demand growth continues to rise sharply, as expected! That seems crucial.

As in recent months, it was mentioned again on Thursday that the key indicator for OPEC is not the price of oil, but the level of oil inventories. In the OECD countries they are still 150 million barrels too high. At the next OPEC meeting in June, one will take a closer look at this metric and see if that number has been significantly reduced. Maybe there will then be an “adjustment” of the deal, and Russia will quit it? Maybe also partners within the OPEC?

But even for this Scenario Al Falih had his solution ready on Thursday´s meeintg in Vienna. On demand of a journalist, he clearly emphasized that the Saudis would maintain their role as trailblazers of the deal, and were ready in 2018 to reduce their own production significantly more than they had promised. Alone the Saudis had already contributed 700,000 barrels a day to the cuts. The Saudi reductions can therefore compensate for increases in other countries.

So the cut deal (if you look at the big picture) should keep the balance between supply and demand until the ever increasing demand (year after year) makes cuts unnecessary – that’s how you could put the subliminal message into words , So, can we adjust to further rising oil prices, because demand will outstrip the supply side, and OPEC will keep the supply side low before that happens? That’s the key question!

OPEC can be right with its strategy. But we think: Do not forget the frackers and a demand side, which may not be constantly increasing. These are imponderables that nobody can predict today – or do you have a crystal ball? Here are some original statements from the official OPEC announcement:

Noting that OPEC and participating non-OPEC countries accepted the recommendation of the JMMC, composed of Algeria, Kuwait, Venezuela, Saudi Arabia and two participating non-OPEC countries –the Russian Federation and Oman–, chaired by Kuwait, and co-chaired by the Russian Federation, and decided that the JMMC should continue monitoring conformity levels, as well as market conditions and its immediate prospects, and recommend further actions, if deemed necessary; and furthermore, that the JTC, supported by the OPEC Secretariat, shall continue to provide its monthly technical assistance to the Bodies of the Declaration of Cooperation;

Recognising the desire of OPEC and the participating non-OPEC countries to achieve oil market stability in the interest of all oil producers and consumers;

Recognising the importance of conforming to the content of the Declaration of Cooperation;

Convinced of the necessity to jointly cooperate to help stabilize the oil market;

OPEC and the aforementioned non-OPEC producing countries have reached the following commitment:

1. OPEC maintains its decisions made on 30th November 2017;

2. The Declaration of Cooperation is hereby amended to take effect for the whole year of 2018 from January to December 2018, while pledging full and timely conformity of OPEC and participating non-OPEC countries in accordance with voluntary agreed production adjustments.

3. In view of the uncertainties associated mainly with supply and, to some extent, demand growth it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress achieved towards re-balancing of the oil market at that time.

4. Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, the Russian Federation, Republic of Sudan, Republic of South Sudan maintain to continue to adjust their respective oil production, voluntarily or through managed decline.

5. Pledge to fulfil their full commitment under this Declaration of Cooperation, individually and collectively;

6. To strengthen their cooperation through a dynamic and transparent framework, including regular monitoring, joint analyses and outlooks for a sustainable market stability in the medium- to long-term, for the benefit of producers and consumers;

7. To support the extension of the mandate of the Joint Ministerial Monitoring Committee (JMMC) composed of Algeria, Kuwait, Venezuela, Saudi Arabia and two participating non-OPEC countries of the Russian Federation and Oman, chaired by Saudi Arabia, co-chaired by the Russian Federation, and assisted by the Joint Technical Committee at the OPEC Secretariat, to closely review the status of and conformity with the Declaration of Cooperation and report to the OPEC – non OPEC Conference;

8. To ensure continuity and proactive cooperation through established regular meetings at technical and ministerial levels.

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