Saudi Energy minister Khalid Al-Falih confirmed over the last weekend that Saudi Arabia will take the lead in OPEC to counter the oil price rout. As signs of a glut are emerging in the US, Al-Falih set the tone for a need by OPEC to cut oil production by 1mn (bpd) from October levels. US President Donald Trump reacted immediately by commenting that OPEC should not make any cuts, which made Brent fall back near 1% below the psychological barrier of $70/b ($ 69.39 / b) and the WTI to below $ 60/b ($59.14 /b).
Given that 50% of global inflation is due to higher oil, it should be expected that Trump’s movement will be positive for lower inflation rates in the near term and, therefore, for the economic cycle. Oil companies, however, will see prices move downwards.
The recent appreciation of the US dollar makes it more necessary for consumer and non-producers countries to reduce oil prices as “this is paid in USD and the US is perfectly aware of it as a geostrategic value,” says analysts at Bankinter.
In fact, oil should tend to become cheaper, regardless of Trump’s comments, following the next reasons:
- High entry of the major world producers: Russia, Nigeria, etc., to improve tax revenues. In addition, the US will probably achieve its geostrategic goal of achieving energy independence in 2019 by producing 12 M b/d of 11.6 M b /d this year. Coincidentally, Kazakstan, which is not a well-known player, is managing to raise its production by + 4.8%, up to 1.82M b/d (representing almost 2% of world production).
- The stabilization of final demand due to global economic cycle slowdown as well as the increase of renewable energies’ share.
- The situation of rather high inventories.
- Speculations on an internal rupture of OPEC that even question their future existence, since non-OPEC producers are increasingly participating in the market.
Even though Saudi Arabia might struggle to convince other producers to follow suit, Russian energy minister Alexander Novak showed no sign he was ready to act immediately. So far, Russian oil producers aimed to boost production at 300,000bpd. Iraq has successfully boosted production to a record. More importantly, US crude oil production posted a new record high, outpacing Russia and closer to the levels Saudi Arabia might attain in the next 6 months.
According to experts at Wisdom Tree, oil prices have declined into bear market territory in a span of a month raising pressure on the OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) meeting to act sooner than their policy meeting on 5th December in Vienna. Furthermore, Iran sanctions did not have the downward effect on oil production as the markets had anticipated as the US unexpectedly provided waivers to eight countries – including South Korea, Japan and India to continue importing crude oil from Iran for the next 180 days.