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The members of the Organization of Petroleum Exporting Countries (OPEC) and their non-OPEC allies, have set the stage for a dramatic meeting at the end of November as bears look firmly in control of oil markets.
The expanded OPEC-plus alliance, which is dominated by Saudi Arabia and Russia, could have headed off potential market troubles by agreeing to extend current supply cuts of 7.7 million barrels a day beyond their year-end expiration date at its latest ministerial meeting. But that decision was put off until their next meeting.
Instead, alliance members plan to go forward with easing the current supply cuts as agreed to in April, which will add 2 million barrels a day to global oil markets beginning January 1.
The problem for the Saudi-Russian led group is that this is a lousy time to be adding more barrels of oil to the market. Global inventories are well above their five-year average.
Benchmark oil prices are stuck near $40 a barrel, and bulls are hard to find in this market. Demand for oil has stalled and is now further threatened by a new wave of Covid-19 cases that has prompted renew lockdown measures in parts of the world, particularly in Europe.
The International Energy Agency (IEA) expects a 500,000 barrels-a-day fall in global demand next quarter.
The supply-side picture is not much better.
The OPEC-plus alliance has had its hands full ensuring its members comply with supply cut agreements to keep oil markets balanced and a floor under prices. Saudi Arabia and Russia have forced serial cheaters like Iraqi, Nigeria, Angola and Kazakhstan, to make “catch-up” cuts to compensate for going over their quotas.
But new threats outside the alliance are emerging that could add more supply to an already oversupplied market, too. Libya is a member of OPEC but the beleaguered North African country, which has struggled with a civil war for the better part of the last decade, is exempt from the supply cut deal.
Libyan production is now on the rise after a blockade of its ports was lifted, and OPEC expects the country’s output will hit 600,000 barrels a day by the end of the year and maintain that level of production through 2021. There are fears that Libya, which has had success ramping up production quickly in the past, could produce as much as 1.1 million barrels a day next year.
Iran and Venezuela — both exempted from the supply cuts due to their being under U.S. sanctions — are also emerging as potential supply-side problems. Some sources report Iran is exporting far more oil than Washington believes, using its extensive network of black-market intermediaries to circumvent sanctions.
The website TankerTrackers recently estimated Iranian exports were as high as 1.5 million barrels a day for September, which is a far cry from the Trump administration’s goal of forcing them down to zero. To be sure, estimates for Iranian exports vary widely, and some think they are actually below 400,000 barrels a day.
Oil traders’ big concern is the uncertainty of Iranian exports under a potential Biden administration. It’s no secret that Democratic presidential candidate Joe Biden would work to reinstate the Iran nuclear deal, under which sanctions relief is the big carrot for Tehran.
The same is true for Venezuela, which somehow managed to increase its oil exports to a five-month high of nearly 700,000 barrels a day in September.
Meanwhile, the output recovery continues in North America, which suffered the worst market-driven supply cuts earlier this year at the peak of the Covid-19 crisis when West Texas Intermediate briefly traded in negative territory. U.S. shale producers continue to struggle financially, but they depend on the cash flow from additional barrels, even if the margins are low.
The U.S. Energy Information Administration (EIA) estimates that U.S. production rose to 11.2 million barrels a day in September. That’s an increase of 1.2 million barrels a day from May, when output reached a two-and-a-half-year low of 10 million barrels a day amid widespread curtailments under low prices.
How bearish is the oil market? There’s roughly the same amount of banks and hedge funds betting that prices will fall now as there was back in April at the height of the Covid-19 pandemic when U.S. crude traded in the red.
Part of the reason OPEC-plus leaders Saudi Arabia and Russia delayed a decision on whether to add more supply to the market was to await the outcome of the U.S. presidential election on November 3.
Suppose Trump, who has been a significant player in OPEC-plus negotiations in the past, loses. In that case, the group needs to get a feel for how a Biden administration will approach foreign policy and energy markets.
Some OPEC-plus members, including Saudi ally the United Arab Emirates, are arguing strongly in favor of the relaxing supply cuts on January 1, as originally agreed to by the alliance. Participants are feeling the attritional effect of months of diminished revenues from the unprecedented output cuts, particularly since they have failed to rally oil prices meaningfully past $40 a barrel. Frustration is setting in and old resentments about subsidizing U.S. shale are emerging in all corners of the cartel.
Still, no one wants to see a return of $30 or lower prices, let alone another price war, which nearly brought the industry to its knees this past spring. Talks at the highest levels between Riyadh and Moscow are already underway. Russian President Vladimir Putin and Saudi Crown Prince Mohammad bin Salman recently held telephone conversations on oil market management efforts. For now, that duo appears to wield enough authority to push through an extension of the current production quotas, but their ability to manage internal tensions amongst their members is limited.
Six weeks is an eternity in the wacky world of OPEC and cartel members could break from the group with little notice. At this point, anything could happen, particularly if the U.S. elections serve up an unexpected wildcard.
