Global oil markets are in danger of seeing a large supply deficit in the second half of 2018, according to Saudi Arabia’s energy minister, unless OPEC takes action to increase output by 1 million barrels per day (Mbd). “One million barrels per day sounds like a good target to work with,” he said.
“One million barrels per day sounds like a good target to work with.”
Speaking at the 7th OPEC International Seminar in Vienna on Thursday, Khalid Al-Falih said a shortage of 1.6-1.8 Mbd may emerge and is calling on his counterparts in OPEC+ to agree to increase supply. “We can change course,” he said, acknowledging that his country and other producers need to be “equally responsive” when shortages may occur rather than only acting when there is a supply glut.
The tension within the group of 24 producers stems from the fact that not every country has the ability to boost output. “How much we distribute among countries and how much is delivered is the debate,” Falih told the audience.
Striking a diplomatic tone, Falih refrained from criticizing other OPEC members with which Saudi Arabia disagrees or U.S. President Donald Trump, who has called out the cartel twice via Twitter in recent months. Iran has been the most adamant about refusing to agree to a supply increase, but it has softened its stance over the past couple of days. Analysts say that Falih’s speech and desire for a large output increase is to satisfy Trump and avoid future criticisms.
The Kingdom would not bear the entire burden of a 1 Mbd increase, as Russia and Gulf states could also modestly increase volumes.
The burden of any supply increase will overwhelmingly fall on the Saudis. Falih said that his country has “a couple of million barrels per day of spare capacity” that can be utilized when necessary. However, the Kingdom would not bear the entire burden of a 1 Mbd increase, as Russia and Gulf states could also modestly increase volumes. As these producers boost output, others—such as Iran, Venezuela, Angola, Libya, and Nigeria—are experiencing either stagnant or declining supply. In Venezuela’s case, production is deteriorating and the country is involuntarily over-complying by about 700,000 barrels per day. Other producers are also reducing output below their quota levels (see below).
Even though it appears Iran and others may be warming up to an increase, it’s unclear if OPEC members will form a compromise at tomorrow’s meeting. “The problem is that I don’t think there is a clear consensus from the oil market as to what exactly is expected of them,” one investor at the Seminar told The Fuse.
“Falih is hedging his bets, trying to satisfy both Iran and consumers,” Joe McMonigle, energy analyst with Hedgeye Research, told The Fuse. “I expect them to come up with a highly creative number, and the market should be cautious in interpreting it. A portion of the number will likely be a ‘paper’ increase.”
“Falih is hedging his bets, trying to satisfy both Iran and consumers.”
While the Saudis worry about a growing supply gap and backlash from consumers, others worry oil prices could plummet on rising production. Even if members cannot agree on a number of an increase,
Saudi Arabia could act alone and boost supply based on its own interests—a move that may moderate prices even if it undermines the Vienna Group’s credibility.
Even as Falih called for an increase to avoid a shortage and a price shock in the second half of 2018, he also touted the actions of OPEC+ over the last 18 months in reducing inventories and clearing the supply glut. He confirmed that the global oil market has rebalanced, but it needs “constant monitoring” to avoid a supply squeeze similar to what occurred in 2007-08.
Falih, throughout his speech, went out his way to repeatedly stress his country’s commitments to consumer interests. “The most important thing is the consumers,” he said Thursday. “We’re not going to allow a shortage to materialize to the point that markets will be squeezed and consumers will be hurt.”
He stated that the desire to increase output to ease prices is not only a response to U.S. pressure, but also the result of dialogues with other consumer countries such as India and China.
Falih also answered questions on plans for state-owned Saudi Aramco’s initial public offering, saying that the IPO will still go forward but the timing and the location are still uncertain. The timing is “not critical” to the Kingdom, but he hopes for it to be launched in 2019. Saudi Arabia will produce a “significant amount of volumes in the next 100 years,” he proudly told the audience.