Opec cuts oil output but sees supply still running ahead of demand

Saudi Arabia’s oil minister, Ali Al Naimi, continued to deflect any suggestion that Opec will need an emergency ministerial meeting to deal with the precipitous fall in oil prices.

A man changes the price for a gallon of gasoline at a gas station in Medford, Massachusetts. Brian Snyder / Reuters

Opec members cut production slightly last month, but the oil exporters’ group still sees supply continuing to outstrip demand for the foreseeable future, according to its latest monthly market report.

The oil markets had another volatile day, as participants tried to weigh conflicting views about whether oil prices are bottoming out or not.

After the previous day’s heavy decline, world benchmark North Sea Brent crude futures were up 70 cents late in the afternoon in the UAE at US$64.94 a barrel, although that put them down more than $4 on the week.

Brent crude prices are near five-year lows and are down about US$50 a barrel – or 43 per cent – since the summer high above $115 a barrel.

In Lima, Peru, attending a climate change conference on Wednesday night, Saudi Arabia’s oil minister, Ali Al Naimi, continued to deflect any suggestion that Opec will need an emergency meeting to deal with the plunge in prices.

Responding to questions about whether the group would need to gather before the next regularly scheduled meeting in June to arrange a production cut, Mr Al Naimi said: “Why should we cut production? Why? You know what the market does for any commodity, what does it do? It goes up and down, up and down.”

The Saudi position has been steadfastly one of letting the market find its own equilibrium. This is in contrast to the position of some other members – including Venezuela and Iran – whose economies are less tolerant than Saudi Arabia and some other Arabian Gulf nations, including the UAE, of oil prices remaining low.

These countries are looking to Saudi Arabia – together with some other Gulf producers – to bear the brunt of any cut, although the Saudis argue that such a move would probably result only in a loss of market share, as has been the case in the past.

In its latest report, Opec’s secretariat in Vienna said its 12 members cut production last month by 390,000 barrels per day (bpd) to 30.05 million bpd, almost bringing it into line with its official production ceiling of 30 million bpd.

Opec is forecasting higher demand for the fourth quarter – expecting it to average 92.5 million bpd versus 91.8 million bpd in the third quarter – but it is also forecasting higher oil supply from non-Opec producers, so that demand for Opec’s crude will barely be in balance even if those forecasts prove correct.

Like other forecasters, Opec has had to continuously revise its predictions this year in light of the fact that demand has turned out weaker, and supply more robust, than predicted.

For the first three quarters of the year, Opec’s production has been running at an average of 860,000 bpd ahead of demand. Much of that oversupply has ended up in storage – for example, OECD oil stocks are up more than 50 million barrels and China’s reserves have increased by more than 20 million barrels compared with a year ago, Opec reported.

In the report, Opec revised downwards its forecast demand for Opec crude next year by 300,000 bpd to 28.9m bpd.

This accounts for a 1.3 million bpd increase in non-Opec output that exceeds the group’s forecast for an overall increase in global oil demand of just more than 1 million bdp.

In the United States late on Wednesday, the government’s energy information agency showed commercial inventories there rising by 1.5 million barrels to nearly 381 million barrels, coming mostly from a slight rise in imported crude.

“This was likely due to a falling crude price environment incentivising higher imports,” said Amrita Sen, head of research at Energy Aspects.

Analysts are now divided about the outlook for oil prices. A report by Bank of America Merrill Lunch’s head of commodity research, Francisco Blanch, this week predicted oil prices would decline to $50 a barrel early next year.

But less noted was a prediction by the same bank’s energy expert, Sabine Schels, of prices back in the $80 to $90 range by the second half of next year as the low prices discourage supply.

Other analysts are also foreseeing a turn in the market’s mood as lower prices force firms to delay new projects. “As you start to reduce [the number of new] projects with lower oil [prices], that gets bullish for oil [prices] further out,” said Adam Parker, head of US equity strategy at Morgan Stanley.

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