As OPEC ministers prepare to meet in Vienna this week, Qatar abruptly announced its withdrawal from the producer’ group. While the move sparked a lot of speculation, it will not have a significant impact on supply. Get Ann-Louise Hittle’s analysis of this and other key talking points including Trump and production cuts at this week’s OPEC meeting.
Qatar’s exit won’t affect 2019 oil supply in a significant way since it’s a small oil producer and has minimal spare capacity.
How worried is OPEC about Qatar?
Qatar is a small producer of about 600,000 to 650,000 barrels per day with minimal spare capacity. Its exit won’t affect the volume of oil supply in the market during 2019 or put at risk OPEC’s goal of reducing output next year. However, it does come at a challenging time for the group, which needs to hammer out a deal in the face of market scepticism about its ability to control production. More positive for OPEC is the statement from President Vladimir Putin that Russia has agreed to cooperate with OPEC and Saudi Arabia to ensure production restraint during 2019. Putin said the scale of the reduction has not been agreed, but endorsed the concept of cooperation.
Why is Qatar withdrawing now?
Qatar’s focus on its role as a global leading gas producer plays a major role in its withdrawal from OPEC. The regional blockade against it (in place since June 2017), less so. The smaller OPEC nations have a relatively quiet role in the group’s decision-making and Qatar may also see that it has less to gain from its membership now that is not involved in the GCC.
Saudi Arabia is keen to reduce output; the US is pushing for lower prices. How is this going to play out?
We expect a production restraint agreement to emerge from the meeting and have had this in our 2019 base case forecast. We have expected this for some months because without it, there will be a large-scale oversupply.
We forecast total global supply in 2019 will increase by 1.7 million b/d year-on-year. This forecast takes into account moderate production restraint from OPEC and Russia. We see oil demand rising 1.0 million b/d year-on-year in 2019. This means there will be an implied stock build next year, even with production restraint of about 0.8 million b/d.
The alternative to such an agreement would be further decreases in price. To a degree this outcome has already been priced, as some believe President Donald Trump’s pressure for lower oil prices could prevent an OPEC+ agreement. However, the oversupply would be enough to cause further downward moves in price from current levels.
An additional decline in price would put the US Lower 48 tight oil producers under pressure to reduce drilling. President Trump might well face pushback on this front, similar to the pressure his administration is facing over the China tariff policy.
What role will Russia play?
President Putin was supportive of the production restraint agreement reached in late 2016. We expect some production restraint from Russia for 2019.
And Trump?
Trump’s call for lower oil prices is at odds with his pledge to support the US oil and gas industry and pursue ‘Energy Dominance’. But he is keen to ensure the US relationship with Saudi Arabia is not threatened or downgraded by the fall-out from the Khashoggi murder. Furthermore, he wants to protect economic growth. President Trump may well ease his recent push for further declines in price, having already achieved much of his goal with the decline from $85 to the $60-$69 range for Brent.
Trump’s response has been designed to protect the relationship with Saudi Arabia and to show the benefit of US-Saudi ties by highlighting the lower oil prices that were achieved in November. The administration is strongly in favour of working with Saudi Arabia to curb Iran’s influence in the region.
What is the 2019 outlook if OPEC cuts production?
In our base case, we assume OPEC cuts production moderately in order to prevent a large oversupply in 2019. We are forecasting strong growth in global supply that outpaces the gain in oil demand of 1.1 million b/d (forecast).
What is the likely impact on oil prices?
We would expect the cut to stabilise prices and prevent further declines. If it is a clear commitment to cut 1 million barrels per day, then we would expect prices to rise several dolllars a barrel.
OPEC’s decision on production levels is key because it helps determine the scale of oversupply during 2019. The other factor is the rate of demand growth and the risk of an economic slowdown, which would weaken the oil demand outlook. Currently Wood Mackenzie is forecasting a year-on-year increase for 2019 of 1.1 million barrels per day in oil demand.
OPEC’s main challenge is twofold: to reach agreement on the size of the cut and then to divide reduction among its members. This is more difficult to achieve than releasing a statement saying all OPEC members agree to 100% compliance to the December 2016 agreement. Saudi Arabia would like to see other producing nations adhere to production cuts so it does not carry the burden alone. Libya and Nigeria are currently exempt from production restraint and their status needs to be considered. Iraq will be another tricky issue since it is seeing production growth and capacity gains.
Will Trump influence the decision?
Trump has put pressure on OPEC and Saudi Arabia to lower oil prices. That goal has been achieved. The question is, would Trump be satisfied if prices hold steady at around current levels? The US oil producers will start to come under pressure if prices fall much further from the recent lows.
Source: Wood Mackenzie