Oil ministers of the Organisation of Petroleum Exporting Countries (Opec) and producers outside the group will convene in Vienna tomorrow to consider the possibility of extending production cuts amid the backdrop of increasing geopolitical tensions and stronger oil prices.
The price of Brent stood at US$63.07 yesterday afternoon after reaching $64.27 earlier in the month as the fallout over the Kurdish referendum vote and supply disruptions caused production from the disputed northern Kirkuk fields to fall below 40 per cent.
Opec’s historic agreement to cut production among member states and compliant producers outside of the group last year has helped resuscitate an oil market that saw Brent fall to under $29 at the beginning of 2016.
The agreement to slash output by 1.2 million barrels per day from January has kept prices in the $50 range for much of the year. The big question is whether the tepid recovery of oil prices to $60 a barrel can be sustained through to 2018.
On Tuesday, the Minister of Energy Suhail Al Mazrouei, speaking at a petrochemicals forum in Dubai, said the Opec gathering in the Austrian capital “was not going to be an easy meeting”, while Saudi oil minister Khalid Al Falih, who delivered the keynote at the forum, said it “was too early to talk about a normal level for inventories”.
Opec along with producers outside the group have looked at using production cuts as a double-edged sword – driving prices up and lowering the levels of oil inventories to below their five-year average.
Earlier in the month at the Abu Dhabi International Petroleum Exhibition and Conference (Adipec), Mr Al Mazrouei said an oil market which saw prices fall below $40 only to then rise above $60 can’t be considered a stable environment that allows for the return of energy investment.
The consensus among Gulf producers appears to be for an extension, perhaps even until the end of 2018 according to some reports.
In October Saudi Crown Prince Mohammed bin Salman said he supports extending production cuts as well. The kingdom, which is the world’s largest crude exporter, needs prices to remain stable for a planned initial public offering for Saudi Aramco next year that may raise as much as $100 billion.
The UAE would also like to see stable oil prices to boost energy investment into projects.
This week, the country’s Supreme Council of Energy approved a capex plan of Dh400bn to be spent in unlocking unconventional sour gas reserves offshore and onshore Abu Dhabi as well as in investments on downstream projects abroad.
The fall in oil prices from $100 levels in 2014 has impacted investment in energy projects across producing nations – including non-Opec Oman, which has slowly begun wooing oil majors back into its vacant concessions.
While the GCC states’ enthusiasm for slashing production even above their share of the quota is unquestionable, the Vienna gathering may still prove to be a challenge.
Suppliers looking to cut production also have to worry about the rise in flow of US shale oil – emboldened by the recent surge in prices – back into the market. US shale oil looks likely to edge into markets dominated by Gulf Opec oil.
In October, India received its first ever shipment of US shale – a 1.6 million barrel cargo – from its eastern coast as the world’s third largest consumer of oil looks to diversify its supply geopolitically-sensitive Middle East crude.
Also likely to weigh on the oil markets will be policies enacted by Asia’s big consumers India and China to push for electric cars and fuel-efficient consumption as a result of them suffering off-the-charts pollution levels in their big cities in 2017.
With so many factors weighing on the markets and policy makers, the Vienna meeting as Mr Al Mazrouei put it “is not going to be an easy one.”