OPEC/non-OPEC Likely to Extend Production Cut Deal
As OPEC is increasingly requested to further cut crude oil production, new speculation, based on statements by senior officials of OPEC MCs, suggests that OPEC will consider preventive supply cut at its 177th Ministerial Conference due to be held on 5 December 2019 in Vienna.
OPEC Secretary General Mohammed Sanusi Barkindo has recently said the Organization will do whatever necessary to prevent market recession, and OPEC MCs have tendency toward exploring all options. In this regard, newly-appointed Saudi Energy Minister Abdulaziz bin Salman has also said that his task is to examine the surplus in the market.
Even Russian President Vladimir Putin, who is OPEC's most important ally, has said he acknowledges the need for further cooperation of OPEC/non-OPEC. Various issues such as the release of figures and statistics on world economic growth rates in 2019 and 2020, US inventories and oil freight rates caused changes in oil prices. The figures indicate that the oil market is more unpredictable than ever, and will jump in parallel with every uncertainty and speculation.
Recently, we have witnessed signs indicating that OPEC and its allies were agreeing upon continuing to cut production, and because of this oil prices have jumped 1 % to reach$ 59.5. According to data released by the International Monetary Fund (IMF), the world economy is ending 2019 with declining economic growth rates. This situation emanating from rising regional tensions and trade wars, may affect many countries for a long time. The IMF report, which is indeed an outlook on the future of the world economy in the short term, confirms that at least in the next three months conditions would not improve and demand for oil would not increase. Therefore, it will strengthen the willingness of OPEC and its allies for further cuts.
Despite the decline in oil prices and the increase in the refiners' motivation to continue their production activities, the high rate of oil shipment did not necessarily lead to US oil exports increase. Due to the high rate of oil shipments from the US Gulf to Asia, many buyers prefer to use their own reserves of oil. And while hopefully waiting for reduction in shipments cost, they just make new orders for the medium term. It is not just confined to the United States that has reduced its oil exports, the other producing countries are on the same boat, as well. Due to this, oil trade trend has been recently so slow.
Even though the index of shipping rates for oil shipments from the Persian Gulf to Far Asia reached $ 300,000; oil tankers transportation cost, raising US reserves and the likelihood of further decline in oil production by OPEC were not the only factors affecting oil prices. Over recent months, rising international tensions in the Strait of Hormuz, and increasing insecurity in the Red Sea on one hand, as well as halt in the activities of Casco China with regard to oil transportation, the world's largest shipping company, are among the other factors contributing to oil price volatility. In an unprecedented event, China's economic growth, the world's second-largest economy reached 6 percent in the third quarter of 2019.The figure was 0.2 percent lower than projected and it is the country's lowest seasonally-adjusted growth rate since 1993. It seems that the consequences of a trade war with the United States is emerging more than ever in the Chinese economy, and some economists have warned that the continuation of the current trend could push China's economic growth to below 6%.
In July this year, OPEC and its allies came to an agreement to continue complying with the OPEC Plus reduction deal. According to the deal, which is valid by the end of March 2020, its signatories collectively cut production by 1.2 mb/d. Oil prices rose to $ 62 and 48 cents after OPEC Plus announced the continuation of the deal. Despite the 200% compliance of the signatories of the deal, oil prices ended the week below $ 60 in September. This led to some speculation about further cuts in oil production at the upcoming OPEC Conference in Vienna on 5 December. It is speculated that while many experts believe that if signs of continued economic weakness and stagnation emerge in some major countries such as Germany, China, the United Kingdom, and so on, OPEC will cut its oil production by 500,000 barrels to raise the price.
"Most of the oil-producing countries are concerned about falling demand and the uncertain future of the economy," said Thomas Weimel, head of the Commerce Department at Total. He continued as saying "In fact, the concern about slowing economic growth and increasing trade conflicts more influence oil prices than sanctions and drone strikes." Although experts believe that slowing economic growth is the most important factor affecting the decline in oil prices in the market, OPEC members are of the opinion that the drop in oil prices is a result of oversupplied market. Saudi Arabia's Minister of Energy Abdul Aziz bin Salman said: "Our task is to review the surplus. We are trying to eliminate the surplus supply to raise prices. "
Concerns about the future of world economic growth is the most important factor impacting oil prices, especially if demand for energy declines by China - the second largest energy-demanding country in the world declines. China has recently released a report on its economic growth that raised global concerns. According to the statistics, China's economic growth rate for the 3Q 2019 was much lower than that of the same period last year. The figure, which was 6%, has been unprecedented in the last three decades. This shows that China's share of oil demand will constantly decline, unless China and the US reach a trade agreement.
The impacts of the trade war and the rise of skepticism and uncertainty about the future have led many forward-looking analysts to take into consideration oil demand reduction in the 2020 horizon in their analyses, as they believe that due to structural problems such as inflation, inaccurate fiscal and monetary policies, the probability of budget deficit increase in the world's top economies, and rising international and commercial tensions; the conditions will certainly worsen the financial crisis even worse than the one in 2008. An instance of this claim is that China's economic growth is slower than expected and the US budget deficit is rising. However, there are some analysts who believe that areas of the globe such as Asia Pacific by the time horizon of 2025 are in dire need of oil and products, and thus demand in them are not affected by the trade war. The need for oil in the above-mentioned areas for the next six years is in a way that most probably they would face a serious problem to meet their routine needs. In other words, although all countries are affected by the trade war and therefore the demand for oil has decreased, by 2025 the region along with China will face a deficit of about 6 mb/d."