OPEC and Russia-led countries, part of an oil supply deal, reached a preliminary agreement to increase output from the group by a nominal 1 million barrels per day starting July 1.
“The global economy is strong, oil demand remains robust, the market is evidently rebalancing, and the return of more stability has been welcomed by all stakeholders,” Suhail Mohamed Al Mazrouei, UAE minister of energy and industry, and president of the OPEC Conference said at a Vienna meeting held to assess the market and decide on a course of action.
Brent has rallied from mid-2016 lows of around US$44 to hit $78 per barrel in May this year, triggering U.S. President Donald Trump’s call to OPEC to bring the oil price back down.
OPEC, which insists its agenda is to bring balance to the market and not control the price, has changed its course after a year and a half of cutting oil production by 1.2 million bpd with the help of Russia-led non-OPEC members in a deal meant to eradicate a stock overhang and bring inventories back to a five-year average.
The agreement – called the Declaration of Cooperation (DOC) was signed in Nov. 2016 and has been extended twice to run through 2018. But recently, OPEC has been questioning whether a five-year average benchmark is sufficient in bringing the market back into balance, even as parties to the deal exceeded supply cut targets.
In May, production cut conformity levels were exceeded by 47 per cent, which effectively translates to 850,000 barrels a day of additional supply losses than intended as Venezuela’s oil industry collapsed. This follows a few other months where conformity exceeded 100 per cent - a target OPEC said countries party to the deal will have to adhere to going forward.
The industry is now worried about a supply deficit as inventories dropped below the 5-7 year average, Khalid A. Al-Falih, Saudi Arabia's minister of energy, industry and mineral resources said, adding that oil demand in the second half of 2018 is expected to be more than the first half by two million barrels per day.
Since the DOC came into effect, total global demand has increased by more than three million barrels while OPEC and non-members’ supply has declined by 2.8 million barrels per day, he added.
“If we took no action, the supply deficit in the second half of the year could rise to an unacceptably high figure of 1.7 million barrels per day, and OECD inventories would be further drawn down by another 300 million barrels. But the downside does not stop there. This evolving situation could have an exceedingly negative impact on oil demand growth,” Al-Falih said.
Current OPEC president Al Mazrouei said the committee monitoring the oil supply just last month acknowledged the rising concerns expressed by some importing and consuming countries regarding potential shortages in the global oil market
“To put this into some perspective, in the period to 2040, the required global oil sector investment in OPEC’s World Oil Outlook is estimated to be $10.5 trillion, with oil demand set to surpass 111 million barrels a day by 2040,” he said.
“It is also important to remember that investments are not only about boosting new production. Oil producers also need to account for natural decline rates,” he added.
Meanwhile, Iran has until the last minute opposed changing production strategy which would address the high oil price – blaming U.S., which renewed sanctions on Tehran, for part of the increase by pulling out of the global accord with Iran to curb its nuclear ambitions.
“Our view is that there are fundamental signals within the market that show this decision is an essential move to avoid an overly tight market and potential price spike in the second half of this year,” said Bjørnar Tonhaugen, vice president of oil market research at Rystad Energy.
The market will lose additional supply from Venezuela and Iran during the course of 2018. Although it is too early to know the full impact of US sanctions on Iranian production, Rystad Energy expects Iranian production to drop by approximately 700,000 barrels per day by December 2018, but the loss could be larger, the energy consultancy firm said.
“There are indications that Iranian oil exports have already begun dropping during the first half of June, mostly to Europe. We also expect Venezuelan production to decline a further 150,000 barrels per day towards year-end, with risks still skewed to the downside,” said Tonhaugen.