Maintaining a stable world oil market is a global responsibility and not one that should fall squarely on the shoulders of the Organization of Petroleum Exporting Countries, two of the cartel’s primary decision makers emphasized during separate discussions at CERAWeek by IHS Markit on Mar. 7.
In past industry downturns, non-OPEC producers “simply reaped the benefits of OPEC supply reduction,” but now OPEC has made it clear it “will not bear the burden of free riders,” explained Khalid Al-Falih, Saudi minister of energy, industry, and mineral resources, and chairman of Saudi Aramco, to his Houston audience during a ministerial address.
“We can’t do what we did in the ’80s and ’90s by swinging millions of barrels in response to market conditions,” he stated. OPEC members and 11 non-OPEC nations late last year altogether agreed to cut production by about 1.8 million b/d through this year’s first 6 months (OGJ Online, Dec. 13, 2016).
Al-Falih noted that history has “demonstrated that intervention in response to structural shifts is largely ineffective,” which is why Saudi Arabia “does not support OPEC intervening to alleviate long-term structural imbalances” instead of addressing “short-term migrations such as financial crises, economic recessions, unforeseen supply disruptions, or what we see today—what we consider to be a temporary inventory glut.”
Long-term ‘collaborative framework’
The current deal is distinctive from past deals in that it’s merely “a collaborative framework for production management” for a set period of time that will kickstart a rebalancing and allow the free market to do the rest. “Saudi Arabia has so far led by example for the first 3 months,” Al-Falih said, by reducing its output more than it agreed upon in December and thus “well below” its maximum production capacity of 12.5 million b/d.
“We will decide with our partners what to do in the second half,” Al-Falih said, noting that inventory relief has come slower than he thought during the first 2 months of the year. While the “green shoots” of a global recovery may be under way, those shoots “may be growing too fast” in the US.
OPEC is scheduled to meet again on May 25 in Vienna, where the major producers from both within the cartel and outside of it will assess the global oil market and whether or not further collaboration is necessary and even possible.
“We agreed in Vienna that to rebound this market we have to address that one variable in the equation,” said OPEC Sec.-Gen. Mohammad Sanusi Barkindo during a luncheon on the global oil market. That variable, he said, is inventories and their inverse relationship with crude oil prices. Results on that front “will determine how to move forward” on possibly extending the agreement.
Al-Falih said the group of producers is working together to ensure their collaboration “transcends this market cycle,” and Barkindo sees it lasting “in the medium to long term.” But Al-Falih reiterated future agreements will not come at the expense of Saudi Arabia.
Western interests still present
Saudi Arabia nonetheless “has a vested interest” in the US petroleum industry and overall economy and will continue to invest in the region, Al-Falih said. Enabling Saudi Arabia to advance its US downstream growth, for example, is the division of assets, liabilities, and businesses by Aramco and Royal Dutch Shell PLC in US-based refining and marketing joint venture Motiva Enterprises LLC (OGJ Online, Mar. 7, 2017).
Conversely, Aramco’s initial public offering in 2018 and the country’s initiative to diversify its economy in “Saudi Vision 2030” promises to attract investment from the US.
Barkindo said OPEC believes the shale revolution that began almost a decade ago was “timely” and “welcome” given the global supply-demand balances at a time when output was declining from Libya, Nigeria, and Iran. Without the additional supply from the US, the global economy could have been “in a deep crisis,” he said.
During a meeting on the sidelines of the conference with chief executives of major US shale producers, Barkindo said he “congratulated them for pioneering this new frontier” of shale, praising their combination of technology and operational skills, managerial ingenuity, and a financial system that supports creativity.
“We only wish that it was done in an orderly fashion without creating this severe cycle that we are still battling to come out of,” Barkindo added.
Contact Matt Zborowski at [email protected].