OPEC Lost Control Over Oil Price Market
It was expected one day OPEC could lose control of the oil market. OPEC has been struggling for the past few years to keep full control over the market, despite several attempts to engage members and non-members into agreements as the last move to stay a leader in the market. OPEC has lost full control of the market; three men are going to determine the course of the oil prices in 2019 and beyond. With three different agendas it is going to be interesting to watch how they are going interact while keeping the market stable.
OPEC is struggling to find a common ground, for the past year U.S., Russia and Saudi Arabia have dominated the market supply globally. They have produced more oil than OPEC’s 15 members combined. All three are pumping a record rates and each of them could raise output again next year.
It was Saudi Arabia and Russia that led the push in June for OPEC group to relax output restraints that have been in place in 2017. Since the changes, production record for U.S. output soared unexpectedly at the same time, as companies are producing from the Permian basin in Texas overcame the pipeline bottlenecks to move their oil to the Gulf coast.
As oil prices have headed south, Saudi Arabia said it would cut its export to 500,000 bopd next month and warned fellow producers to cut about 1 MMbpd from October production levels. The announcement drew a lukewarm response from Putin and a swift Twitter scolding from Trump.
Bin Salman has an ambitious plan to transform Saudi Arabia, using oil revenue to fund it. The International Monetary Fund forecasts reported the kingdom will need an oil price of $73.3/bbl next year to balance its fiscal budget. Brent crude is trading about $5 below that, with Saudi Arabia’s exports trading at a discount to the North Sea benchmark. Prolonging output cuts for a third year is the only way he can realize the price he needs.
Bin Salman is facing challenges from Putin and Trump. Putin is not willing to restrict production in his country, but to improve relationship with the Crown Prince Russian president Putin could agree to extend output cut. In regards of President Trump, the response to could be louder from harsher sanctions to the kingdom in response in Yemen and the killing of dissident journalist Jamal Khashoggi.
Saudi Arabia will have to face Trump’s wrath, Putin’s indifference and a booming U.S. shale industry if it hopes to balance the oil market in 2019. We should not discount U.S. and Russia are still racing to be the top oil producers and influencers.
To be continued…