The oil market is well-balanced and well-supplied.
This was one of the key messages in the speech that OPEC’s Secretary General Mohammad Barkindo delivered at the Oil & Money Conference in London this week.
The oil market isn’t necessarily all in on OPEC’s ‘well-supplied’ narrative—the perception among market participants has been for weeks that the market is short on oil and will continue to tighten even more when U.S. sanctions on Iran snap back in three weeks’ time and Venezuela’s unstoppable production decline continues.
Despite assurances from oil experts and officials that there isn’t any shortage of supply، the ‘fear factor’—as Vitol’s chairman Ian Taylor put it—has largely، until today، overshadowed fundamentals and is making the oil market more emotional than usual.
OPEC’s chief attempted to calm market fears، assuring delegates at the London conference this week that there is plenty of oil to go around، that Russia and Saudi Arabia are adding supply as promised in June “to maintain the supply and demand balance،” and that OPEC’s largest producer Saudi Arabia “has not turned down a single customer.”
Barkindo’s speech coincided with the publication of the cartel’s Monthly Oil Market Report، which showed that Saudi Arabia added 108،000 bpd of production last month، lifting output to 10.512 million bpd، and that Russia pumped a post-Soviet record high of 11.54 million bpd، up by 150،000 bpd from August. OPEC’s increased production and the help from Russia offset a 150،000-bpd production loss in Iran and another plunge in Venezuela، which is now pumping less than 1.2 million bpd، as per OPEC secondary sources. At the conference in London، Barkindo also revealed that one of the key oil customers and demand growth drivers—India—had sent a letter to OPEC complaining about the high oil prices it is now paying for oil.
OPEC is scheduled to hold talks with India on October 17، as it wants to ease consumer fears، the cartel’s chief said.
India has expressed “discomfort” with the high oil prices، Barkindo said، noting that “As one of our major consuming countries، of which we have an official energy dialogue، it was also a concern for us getting this feedback from India.” And it should be a concern for OPEC، because India—also struggling with a massive local currency depreciation which makes oil even more expensive for it—is a key demand growth driver، and this ‘discomfort’ may be a sign that demand destruction is coming with Brent Crude prices above $80 a barrel.
“I’m confident، hearing from our largest producers، that they are ready، willing، and capable to ensure that this market remains well supplied،” OPEC’s head stressed، as quoted by Platts.
“The market has been reacting to perceptions of a supply shortage، it is not really as such. The balance may be fragile as a result of non-fundamental factors، but I remain confident that we will overcome.”
Not only is the market currently well-supplied، projections point to a possible rebuild of stocks in 2019، Barkindo said.
Despite assurances that there isn’t any shortage of oil in the world and that Saudi Arabia and Russia would be keeping the supply-demand balance، OPEC’s head admitted that current market forces are definitely not the fundamentals، and are out of reach of the cartel’s control. “Nonetheless، we do recognize that there are many non-fundamental factors influencing the market that are beyond the oil industry’s control، such as geopolitics، growing trade disputes، natural disasters and other developments. They can have compound effects and are a major source of uncertainties،” Barkindo said in his keynote speech.
OPEC’s report and the chief’s speech at the conference—along with the EIA’s report that US crude stocks saw a sizeable increase—did manage to assuage fears and contribute to a price decline in the last couple of days.
Despite these assurances from OPEC، it’s likely that the oil market will continue to be ruled by emotions rather than fundamentals for at least another month، until participants see how much Iranian oil will really be choked off by the sanctions، how much the Saudis and Russians are able (and willing) to offset، how low Venezuelan production would drop، or how Libya andor Nigeria will keep their ever-fragile production recovery.
There may be no shortage of oil whatsoever، but the perception of a supply squeeze may still be the dominant narrative on the market over the next few weeks and months.