OPEC’s Secretary General Mohammad Barkindo said on Thursday that the cartel sees the oil market well supplied and in concerned that an increase in production could cause another supply glut. Reuters photo by Heinz-Peter Bader.
Oil market influenced by many non-fundamental factors
Mohammad Barkindo, OPEC’s Secretary General says the cartel is concerned that the well supplied market could evolve into a surplus market next year should the group expand its June agreement to increase production.
Last week Brent oil prices climbed to $86.74/barrel, the highest since 2014 as the US sanctions on Iranian crude exports loomed. Prices fell this week as the global markets grew more concerned about ongoing trade wars and expectations of rising interest rates.
Speaking at Oil & Money conference in London, Barkindo said there are many non-fundamental factors influencing oil prices that are beyond the control of oil producers.
“The market has been reacting to perceptions of a possible supply shortage. The market remains well supplied,” Reuters reports he told a briefing at the conference.
“The projections for 2019 clearly show a possible rebuild of stocks,” Barkindo said of the oil market balance for next year.
On Thursday, OPEC released its updated oil supply and demand forecasts. The cartel cut demand estimates for 2019 as escalating trade wars and volatile emerging markets signal a drop in crude demand.
The Trump administration’s decision to re-impose sanctions against Iranian crude exports is one of the factors in rising oil prices, according to analysts and some members of OPEC.
In response to the rising oil prices, Trump has called on OPEC to increase its production. Meanwhile Barkindo questions Trump’s assertions that OPEC is unfair, adding “the market is currently being largely driven by decisions taken elsewhere – outside OPEC, outside non-OPEC.”
In June, the cartel along with its partners in the OPEC supply cut agreement opted to return to 100 per cent compliance with the deal. For months, underproduction in Venezuela and other group countries pushed adherence to the agreement to over 160 per cent.
According to OPEC’s report for September, the cartel boosted its production by 132,000 b/d to 32.76 million b/d, the highest in 2018. Producers have not yet increased their output to reach 100 per cent compliance.
Barkindo told Reuters that OPEC producers were taking production increases step by step.
“We have to continue to assess to see how and when we will achieve the 100 per cent conformity and how the market would respond, hoping that some of these non-fundamental factors will evaporate by then,” he said.
“We remain faithful to what we agreed in June.”
In early December, the cartel will meet in Vienna along with its allies to decide policy for 2019.
The cartel cut its estimate for demand next year for its crude to 31.8 million b/d due to weakening demand and rising supplies from producers outside the cartel.
According to the report, if OPEC continued to produce at its current rate, there would be an excess supply of almost 1 million b/d in 2019, however, this amount does not take into account any sizeable cut in Iranian output.
In September, Iran pumped 3.45 million b/d. This is down 150,000 b/d from August. Under the previous sanctions that were lifted in 2015, Iranian crude production dropped below 2.7 million b/d.
Barkindo added that oil producers are worried that increased production will cut into spare output capacity which could hamper any efforts to make up for sudden supply shortages, especially at the current time when energy-industry investment is lagging.
“We are very concerned,” Barkindo said when asked about spare capacity.
After years of sluggish investment, Saudi Arabia is the only crude oil producer that has enough spare capacity on hand to increase its supply.
Saudi Arabia’s Energy Minister Khalid al-Falih said earlier in the month that the kingdom will invest $20 million in the coming few years to maintain and perhaps expand its spare crude production capacity.