OPEC Leader Cites ‘New Optimism’ With Oil Prices on the Rise
VIENNA — As officials from some of the world’s biggest oil producers arrive here in Vienna, they have plenty to be cheery about.
Oil prices have risen unexpectedly fast of late, surging 20 percent since the beginning of September, providing much-needed money for the strained budgets of the 14 members of the Organization of the Petroleum Exporting Countries.
That leaves OPEC members with a quandary: Do they again extend production cuts first announced a year ago? What had seemed to analysts to be a foregone conclusion now looks to be more complex.
The group of oil exporters, along with some nonmembers like Russia, agreed to the production cuts to ease a glut in the market and bolster prices. To some extent, that appears to have worked. Brent crude oil, the main international benchmark, is trading at around $64 a barrel, even after falling slightly this week. Some analysts see prices topping $70 next year.
While those figures are well below the heights of more than $100 in 2014, they are more than double the price early last year. In a speech welcoming delegates to Vienna on Monday, the cartel’s secretary general, Mohammad Barkindo, spoke of “a new optimism in the oil market not seen for a very long time.”
According to OPEC figures, the cartel has cut production by about 700,000 barrels a day from a year ago. Russia is holding back another 300,000 barrels a day. That trim, though, amounts to slightly more than 1 percent of global supply.
A bigger influence has been a stronger global economy driving demand for oil. Economists have been upgrading their forecasts for growth worldwide, and that has affected demand, which has risen by nearly five million barrels a day since 2014. That is more than the total daily output of Iraq, OPEC’s second-largest producer.
The twin factors have recently helped make a dent in the substantial inventories of crude that had built up on tank farms, sprawling sites where enormous drums hold excess supplies of oil, around the world.
Other events have played a role. Hurricane Harvey, which swamped oil installations on the gulf coast of the United States in August, caused major disruption and highlighted the dwindling stockpiles.
“All these factors prop up a higher price,” said Sadad I. Al-Husseini, a former executive vice president at Saudi Aramco, Saudi Arabia’s national oil company, who now runs a consulting firm.
Political developments in Saudi Arabia and in other major oil producers like Venezuela are also affecting the market.
In Riyadh, two separate campaigns led by the kingdom’s crown prince, Mohammed bin Salman, are raising questions. For one, a crackdown on corruption led by the prince has swept up at least 11 other senior members of the royal family. Though the effort has not disrupted Saudi oil flows, it has added to the uncertainty facing businesses looking to operate in the kingdom.
Saudi Arabia is also pushing forward on the sale of a stake in Saudi Aramco, set for next year. A return to low prices might put that public offering, which is being spearheaded by the crown prince, at risk, giving Riyadh a major stake in ensuring that production cuts hold.
“I am not saying that Mohammed bin Salman is going to fail or be overthrown or whatever,” said F. Gregory Gause, a Saudi expert and head of international affairs at the Bush School of Government and Public Service at Texas A&M University. “But what I always thought was a very stable system is now embarking on changes on numerous fronts simultaneously.”
Political turmoil in Venezuela, a leading OPEC member, has also raised the specter of a sudden drop in its supply of oil. Production has fallen by 500,000 barrels a day, equivalent to around 20 percent of its output, over the last year. That decline is expected to deepen with the government behind on debt payments and unable to pay service companies crucial to the energy industry.
Elsewhere, production and exports have fallen in Iraq because of tensions in the northern part of the country between Iraqi and Kurdish forces.
While these trends have helped push prices up, potential developments could send them lower again, from the impact of shale oil producers in the United States to a collapse of the agreement on production cuts.
American shale companies, in particular, are seen as the swing producers in the market, able to ramp up output to meet rising demand and take advantage of rising prices. These operators, from small companies to behemoths like Chevron and ConocoPhillips, have streamlined operations and can make money at far lower prices than in previous years. Current prices could lead to a surge in drilling.
Higher prices could also strain an agreement between Saudi Arabia and Russia to hold down production.
Russia has been rapidly drilling recently and could add up to one million barrels to its daily output over the next five years. As Western sanctions — a response to Russia’s military moves in Ukraine and Syria and its meddling in the United States presidential election — begin to bite, Moscow’s calculation could change.
“Russia is the kingpin,” said Bhushan Bahree, an OPEC analyst at IHS Markit. Cooperation between OPEC and non-OPEC producers, he added, “would fall apart without Russian participation.”
Still, most analysts expect OPEC and Russia to extend their production cuts. While OPEC has often moved to stem price declines, it has less of a track record of constraining price increases. Exporters want to make as much revenue as they can, particularly to compensate for recent lean years.
“I don’t think many of the OPEC countries think about the long-term aspects,” said Bill Farren-Price, president of Petroleum Policy Intelligence, a market research firm. “What they think about is how do we fulfill next year’s budget.”
“If we can have a few months of higher prices,” he added, “surely that is a good thing.”
Source: https://www.nytimes.com/2017/11/28/business/energy-environment/opec-oil-prices.html