Follow-up Meeting on the Oil Production Reduction

The Joint Ministerial Meeting Committee (JMMC) comprises four OPEC member countries (Algeria, Saudi Arabia, Kuwait and Venezuela) and two non-OPEC countries (Russia and Oman) and will be held at the end of September 2018 in Algiers. This 10th follow-up meeting on the oil production reduction will review all recent market developments and the report provided by the Joint Technical Committee on the monitoring of the overall compliance levels of the participating countries. This meeting will be held in a context, namely the decline in exports from Venezuela, Libya, tensions in Nigeria and US sanctions against Iran.  The trade war between the US, Europe and China under surcharges that could affect a possible slowdown in the global economy will also be looked at.

A reminder of the Vienna agreement of 30 November 2016

Before deciding on a reduction in production of 1.2 million barrels/day, OPEC accounted for only 33% of world traded world production, with the remaining 67% being out of OPEC, no longer having the same market impact as in the years 70.  Many experts question the temptation for producers to makeup natural declines, linked to the depletion of individual deposits and already integrated into the forecasts, and pass them for voluntary reductions.  Following the work of the High-level Committee, which has made it possible to resolve the tensions between Saudi Arabia and Iran, the last meeting in Vienna in December 2016 allowed the member countries of the OPEC and non-OPEC to reach a reduction agreement and this for the first time since 2008 of the oil supplies of 1.8 million barrels/day.  According to this Vienna agreement, it was extended until the end of 2018, the production limits provided for in the agreement affect 11 of the 14 OPEC member countries. The bulk of the agreement of November 30, 2016, is carried by the largest producers of the cartel: Saudi Arabia, Iraq, United Arab Emirates, Kuwait, while Iran, Nigeria and Libya were exempted.  Only Iran has benefited from the most favourable reference with a volume of 3.97 million per day (Mb/d) withheld (against a level of 3.69 Mb/d, although Iran has wished its production to go back to 4.2 Mb/d.  Saudi Arabia agreed to bring back its production to 10.06 Mb/d and thus reduce their production by 500,000 barrels per day (b/d). The non-OPEC countries agreed to a reduction of 558,000 b/d which is in addition to the 1.2 million reductions of b/d from OPEC countries. For non-OPEC, Russia will be the most important of these contributors with a reduction of 300,000 b/d.

See  Prospects for OPEC’s June 22nd, 2018 meeting

The New factors determining the price of oil

Brent’s despite the US president’s threats and an increase in August 2018, according to Reuters agency, of Iraqi and Libyan productions, was rated on September 3rd, 2018 at $78.16 and the WIT at $69.92.  What are the reasons?
Nine determinants of the oil price for 2018 through 2030 as being independent and mainly exogenous factors.
•    The first reason is the geostrategic tensions in the Middle East and the US sanctions against Iran, which disrupt the entire OPEC strategy, albeit timidly attenuated by the European position.  The geo-strategic situation, with rampant tensions with Iran, the security in Iraq, Syria and Yemen at this juncture have raised the price of at least 7 to 8 Dollars per barrel, the right price arranging both producers and consumers, according to Russian and Saudi experts, being $70.
•    The second reason, as just highlighted by the IMF and the World Bank, last month is the growth that is likely to fall especially with the growing rivalries of both America – Europe and America – China on protectionist measures.  The resulting negative impact on international trade would naturally follow, but attention should also be paid to new changes in the way of growth because of the fourth global economic revolution involving a new economic and energy model (efficiency and mix).
•    The third reason is the overall respect or not of each member quotas as decided in December 2016 in Vienna.
•    The fourth reason is the introduction of American shale oil-gas that has upset all the global energy market. Depending on International observers, the desirable price should not be 70 Dollars so as not to penalise global growth and in order to avoid the massive entry of oil and gas from US shales, notably from all those numerous marginal deposits that become profitable at a price higher than 60 Dollars.
•    The fifth Reason is the agreement out between Saudi Arabia and Russia, these two countries producing more than 10 million barrels/day each.
•    The Sixth Reason is the political situation in Saudi Arabia, the markets not yet being able to see clear of the action of the Crown Prince. In his fight against corruption, with the fear of internal political tensions, but above all the sale of 5% shares of a part of ARAMCO, to keep its shares at a high level, a sale that has been postponed to 2019.
•    The seventh Reason is the tension in Kurdistan, the decline in Venezuelan production, and tensions in Libya and Nigeria
•    The eighth reason is the decrease or the rise of the Dollar relative to the Euro.
•    The Ninth Reason Is the decrease or increase in American stocks while not forgetting Chinese ones.

So, what prospects?

How to bridge Iran’s exports by about 2.7 million barrels a day with the risks of developing an informal market lower than the market price? What will happen in case of muscular tensions with Iran controlling the Strait of Hormuz in the Gulf through which transit about 30% of world oil exports?
An equation that can have geostrategic impacts beyond the fundamentals that impact on the price of oil.
For Iran, the only potential markets are in Asia and especially in China: for proof, a Chinese giant taking over the French ‘Total’ withdrawal.  China’s massive investment, not forgetting in Africa, in Iran is likely to upset the entire geostrategic map of the region.  According to OPEC, the difference between 102 Dollars and 45 Dollars since June 2014 in the oil prices, before their straightening resulted in a loss of $1 trillion in revenue and $1 trillion in investment losses.  An OPEC study shows on average that the profitability for many OPEC countries to balance their budget, the price that covers the costs and a reasonable profit margin, must be between 80/90 Dollars, varying depending on the lifespan of deposits and costs per country.  The big problem will be to review the policy of fossil energy subsidies that penalise the energy transition.  Every year in the world, 5.30 billion Dollars ($10 million per minute) are spent by States to support fossil fuels, according to estimates by the IMF report for the COP21.  However, it seems that most of the leaders of the world have become aware of the urgency of moving towards an energy transition.