OPEC+ Deal Not Enough To Save The Oil Market

Authored by Nick Cunningham via Oilprice.com,

If the goal of the OPEC+ cuts was to boost oil prices, then the deal is clearly failing.

OPEC+ is scrambling to figure out a way to rescue oil prices from another deep downturn. WTI is now down into the mid-$40s and Brent into the mid-$50s, both a 15-month low. U.S. shale continues to soar, even if shale producers themselves are now facing financial trouble with prices so low. Oil traders are clearly skeptical that OPEC+ is either willing or capable of balancing the oil market.

OPEC+ thought they secured a strong deal in Vienna in early December, but more needs to be done, it seems. OPEC’s Secretary-General Mohammad Barkindo wrote a letter to the cartel’s members, arguing that they need to increase the cuts. Initially, the OPEC+ coalition suggested that producers should lower output by 2.5 percent, but Barkindo said that the cuts need to be more like 3 percent in order to reach the overall 1.2 million-barrel-per-day reduction.

More importantly, the group needs to detail how much each country should be producing. “In the interests of openness and transparency, and to support market sentiment and confidence, it is vital to make these production adjustments publicly available,” Barkindo told members in the letter, according to Reuters. By specifying exactly how much each country will reduce, the thinking seems to be, it will go a long way to assuaging market anxiety about the group’s seriousness.

Still, the plunge in oil prices this month is evidence that traders are not convinced.

The view is “that the U.S. will continue to grow like gangbusters regardless of price and overwhelm any OPEC action,” Helima Croft, the chief commodities strategist at Canadian broker RBC, told the Wall Street Journal.

“Unless there is a real geopolitical blowup, it could take time for these cuts to really shift sentiment.”

While cuts from producers like Saudi Arabia will help take supply off of the market, OPEC might help erase the surplus in another unintended way. Bloomberg raises the possibility that low oil prices could increase turmoil in some OPEC member states. The price meltdown between 2014 and 2016 led to, or at least exacerbated, outages in Libya, Venezuela and Nigeria. The same could happen again.

Just about all OPEC members need much higher oil prices in order to balance their books. Saudi Arabia needs roughly $88 per barrel for its budget to breakeven. Libya needs $114. Nigeria needs $127. Venezuela needs a whopping $216. Only Kuwait – at $48 per barrel – can balance its books at prevailing prices. Brent is trading in the mid-$50s right now.

That raises the prospect of more unrest. Venezuela’s supply losses are assured – and largely already factored into market forecasts – although the rate of decline remains uncertain. But further unexpected outages are possible, and become more likely with lower prices. Libya and Nigeria are the most likely sources of instability. Unexpected disruptions in supply in 2019 could tighten up the market.

Still, while there are many problems facing OPEC+ as it seeks to balance the market, one important factor lies mostly out of the group’s control. Much of the OPEC+ discussion focuses on supply-side dynamics – how much the group should be producing in order to achieve some price target. But the problems sweeping over the oil market right now could be even larger.

Specifically, a global economic slowdown could translate into much slower demand, a problem that OPEC+ cannot fix. Sinking oil prices isn’t just a matter of market expectations of oversupply from U.S. shale.   

The financial turmoil and brewing economic slowdown is clearly overwhelming the OPEC+ cuts, as well as the jawboning that some OPEC officials have tried over the past week. Stock markets plunged in recent days after the Federal Reserve tightened interest rates yet again and signaled two more rate hikes in 2019.

There haven’t yet been any dramatic revisions to 2019 oil demand from leading energy forecasters, such as the EIA or IEA. But, then again, the financial instability and the souring oil market have only cropped up recently. The IEA has maintained a 1.4-mb/d growth rate for demand next year, but take that with a grain of salt. Demand revisions could be forthcoming. OPEC+ may have to keep its supply curbs in place for the full year in 2019, but it’s unclear if even that can push prices back up to where they were two months ago.