Opec keeps strategy under wraps in oil stumble

23 Sept. 2020-Saudi Arabia’s energy minister is keeping his options open while the recovery in oil prices splutters, setting up a potentially volatile period ahead.Crude prices tumbled at the start of September after traders grew nervous that further potential lockdowns to slow the spread of coronavirus could fracture a fragile recovery in consumption.

But Prince Abdulaziz bin Salman is reluctant to commit to any new measures to bolster the oil market, telling reporters last week that “anyone who thinks they will get a word from me on what we will do next, is absolutely living in La La Land”.His only two predictions were that the market would be “jumpy” in the months ahead, and that he would leave speculators “ouching like hell”.

Analysts say the lack of visibility on the market’s trajectory shows that the world’s biggest oil exporter wants to keep a range of choices to hand, from stricter enforcement of the record supply cuts agreed earlier this year by Opec and allies such as Russia, to promises of even tougher production restrictions.

Investors are hungry for clarity on whether the so-called Opec+ group will change their future supply plans.Historic cuts of 9.7m barrels a day agreed in April among major world producers — ending a price war with Russia started by Saudi Arabia — have since fallen to 7.7m a day. Those cuts are due to ease further in January 2021 as part of a gradual reduction.

The big question now is whether producers follow through with that tapering. Brent crude, the international marker, rose from below $20 a barrel in April to above $45 at the end of August, propelled by the supply-cuts deal. But they have since started sliding again.

Crude was down more than 2 per cent on Monday to about $42, and producers are fearful of another fall. The pace of the oil market recovery has slowed and Saudi Arabia wants to be ready to adjust the policy should they need to. We don’t know how the world is evolving

Local lockdowns in Europe and rising cases in big consumers such as India are causing concern among Opec delegates. They also warn that crude and petroleum product stockpiles are not depleting as quickly as initially predicted. “There is nothing to do right now but to keep on the same path. But we might have to [act] soon,” said one delegate.

Global demand dropped by as much as a third in April from pre-crisis levels of 100m b/d, but has rebounded and is now expected to stand around 94m b/d in the third quarter, according to the International Energy Agency.

Yet the IEA last week raised some red flags: a slowdown in China’s crude purchases and moves by some of the world’s biggest oil traders to start storing oil at sea again.“The uncertainty created by Covid-19 shows little sign of abating,” the agency said, noting that the northern hemisphere winter will make the path of the virus hard to predict.

“The recovery has not been even across the world,” said officials on a Opec+ ministerial committee monitoring the historic supply-cuts deal. They recommended that the expanded group of countries including Russia should take “further necessary measures” when needed. The options, market observers say, include delaying the tapering of the supply cuts, and enacting additional cuts above their assigned targets, as Saudi Arabia and other Opec countries did in June.

Amrita Sen at consultancy Energy Aspects said Saudi Arabia and its partners inside and outside Opec are “hoping for the best, but preparing for the worst”.“Asian demand — a key destination for Middle East oil — is broadly picking up, but consumption in the west is going the other way. It’s so difficult to forecast anything,” she said.

Prince Abdulaziz last week promised a “proactive and pre-emptive” approach. In the meantime, Riyadh is trying to get Opec’s house in order by publicly calling out those countries that it says flouted the terms of April’s production cuts deal.

Should the kingdom need to persuade Russia — which is keen not to lose market share — to rein in production yet again, letting countries such as the UAE, Iraq and Nigeria exceed their promised levels of production would weaken its hand, analysts said.

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“If everyone fulfils their share of cuts now, the Opec+ group will have much more flexibility to adjust policy if it needs to in the future,” said Bassam Fattouh at the Oxford Institute of Energy Studies.

Other wild cards lie ahead in the coming months. In Libya, rebel forces have agreed to lift an eight-month blockade on oilfields and ports, allowing for the resumption of production and exports.

The US presidential election in November could further complicate matters. President Donald Trump forced producers around a table ahead of the historic April agreement. A victory for Democratic candidate Joe Biden could reduce the political pressure on producers to bolster the market at the next round of formal talks later this year, observers say.

But in a month when volatile stock markets reflected the risk that the pandemic still poses to the global economy, demand concerns are dominant.“The pace of the oil market recovery has slowed and Saudi Arabia wants to be ready to adjust the policy should they need to,” said Giovanni Staunovo, commodities analyst at UBS Wealth Management. “We don’t know how the world is evolving.”