The merry days of oil prices kissing and breaching the $70 a barrel mark are here again. There is also good reason to believe that the global benchmark Brent crude could soar above the $80 level this year, if the adherence to the international agreement to reduce oil production in recent months is anything to go by.
It is hard to believe that the Organization of Petroleum Exporting Countries (Opec), which on November 30 extended its deal with a group of 11 non-Opec oil producers, led by Russia, to slash output by 1.8 million barrels a day (b/d) till the end of 2018, will forgo the achievements its sacrifices has brought about. After all it was the concerted efforts of the bloc to boost crude oil prices that first led to such an agreement being inked in December 2016.
Saudi Arabia and Russia, who took the lead in convincing their respective camp members to join the initiative, have effectively overseen implementation of the pact for a full year, and now its renewal for another year, against all odds and skepticism. Mechanisms to ensure commitment to the agreement is respected by adherents, such as the forming of a common ministerial body to act as a watchdog, coupled with geopolitical and economic factors that have hampered production in signatory countries like Venezuela, Libya and Nigeria, have all contributed to the success of the campaign.
However, now that a barrel of crude oil has begun to fetch around $70, a number of disruptive factors are coming to the fore – the foremost of those being the re-emergence of the US shale oil sector, which had been virtually grinded to a halt by the blow of low oil prices, and resumed functioning properly only after prices started its ascent from mid-2017.
With relatively expensive shale oil economically viable to produce again, US oil production has been rising steeply in recent weeks, with the US Energy Information Administration predicting that output will exceed 10 million b/d in February, four months earlier than its own forecast. With encouragement from the administration of President Donald Trump, which has been keenly emphasising on its agenda to boost the country’s energy industry as part of the “America first” policy, it is possible that favourable oil prices will continue to result in output soaring even further this year.
The US, which is highly unlikely to join the Opec/non-Opec group campaign, has to realise that using the deal as an opportunity to advance its market share ambitions has the might to throw oil prices off the cliff yet again. Reports of other non-Opec players such as Brazil and Canada probably raising output are also surfacing. Opec can’t play the godfather alone, all the time, and it is in no oil producer’s interest to spike production at this stage. The cartel expects global demand for oil to grow by over 1.5 per cent this year, the fourth year in a row, so curtailing supply has obvious benefits for all.
While the threat to the Saudi-Russia championed output cut deal is imminent from a hostile US, even risks posed by members from within Opec could also cause upsets. Saudi Arabia’s simmering geopolitical tensions with Iran and Qatar (for which although the reasons are separate), could eventually make both Tehran and Doha refuse to follow Riyadh’s lead, irrespective of how noble the cause is. Already Bijan Zangeneh, the oil minister of Iran, which is not required to curb output as per the deal, has been quoted by local media reports saying that Opec members do not want oil to climb above $60 for fear of attracting a gush of US shale oil into the global market, adding that oil prices have been surging recently due to increased demand for petroleum products in the winter season – views that are not maintained by most Opec oil ministers, and reflect the divide within the cartel.
Iraq’s quest for higher oil revenues to rebuild the economy ravaged by almost two decades of war, sectarian strife and battle against radical terrorists, can also have a dampening impact on the output paring agreement, if it recklessly raises production, as it has done in the past, recording low compliance rates. Although Oil Minister Jabbar al-Luiebi has insisted that Iraq is committed to reduce the global oversupply, Opec’s second largest oil producer’s current output is about 4.3 million b/d, a figure that may easily rise in future if Baghdad’s plans for improving its neglected upstream infrastructure and partnering with IOCs to improve upstream capabilities are largely realised.
While probable disruptions to the continuity of the treaty aimed at balancing the global demand-supply scenario are several, even states that have been key architects of the mechanism and have ardently followed and promoted it have to be wary of their own actions. While the likes of Saudi Arabia, Russia, the UAE, Oman and Algeria have recorded high compliance rates since the start, investments their national oil companies are now making in conducive market conditions to explore for reserves, develop otherwise cost-intensive offshore projects, undertake enhanced oil recovery, and modernise upstream operations, can lure them into concluding the venture prematurely.
The number of factors that indicate a majority decision to end the output reduction agreement at the Opec/non-Opec scheduled meeting in June far outweighs reasons to prolong the deal. It is highly plausible that an international market share contest, similar to the one that triggered the downfall of crude prices in late 2014, will ensue soon should the venture be culminated in mid-2018. Caution must therefore be exercised by oil producers to keep the ghost from the past at bay.