Photo: MLADEN ANTONOV/AFP/Getty Images
Last week, the Organization of Petroleum Exporting Countries-plus (OPEC-plus) alliance’s Joint Ministerial Monitoring Committee (JMMC) convened in Baku, Azerbaijan, to review the state of the current oil market. The group concluded that markets are roughly in balance with adequate current supply and inventory levels. Brent prices in the $65-70/barrel range, though inadequate for OPEC member budget needs, nonetheless are far improved from year-end levels. So with a somewhat complacent yet uncertain attitude and hoping that the next several weeks/months would provide greater market clarity, the group decided to cancel its April meeting and continue with its planned output cuts at least through June—while adding the caveat of continuing to monitor market activity and adjust policies as needed.
On its face, the meeting reflected an attitude of wait and see. This is not an unexpected outcome given the range of uncertainty with supply, demand, and the range of impactful policies and geopolitical events that remain in play (and not unlike the Federal Reserve’s decision to forego interest rate hikes in the face of economic growth concerns). Yet for many participants and observers, the undercurrent suggested a number of troublesome signposts on the horizon. For starters, the sustained growth in U.S. liquids supplies continues to vex and confound OPEC planners. And prospects of higher prices only add to market uncertainty given the stockpile of drilled but uncompleted wells (DUCs), inventory draws and new production elsewhere. Added to the misery is the fact that the OPEC’s cutbacks are opening avenues for alternative suppliers that are eroding the cartel’s own market share.
A range of ongoing geopolitical events—from concerns regarding the pace of global economic growth to trade wars, sanctions, weather events, and supply disruptions around the world—also interject additional elements of risk and uncertainty. The simple fact that U.S. sanctions on Iran and Venezuela (OPEC members exempt from the current cutback agreement) have removed more barrels from global supply than the combined efforts of the producer cartel should more than signal that OPEC’s attempts at “market management” have become inherently more complicated. In addition, variations in crude quality relative to refinery configurations and consumer product demand have added greater complexity as the sustained loss of Iranian and Venezuelan barrels has created a somewhat bifurcated market with a surplus of light sweet crudes and a shortfall of mid-heavy sour barrels.
Real and perceived concerns over the robustness of global economic growth, the state of U.S.-China trade negotiations, Brexit negotiations, and ongoing political upheaval in Libya, Nigeria and now Algeria all conspire to undermine the shelf-life of even the most robust of risk assessments. Tweets and sentiment changes only add to the confusion.
For its part, the Trump administration continues to press the case for ratcheting up sanctions on both Iran and Venezuela, while acknowledging the need to be flexible so as not to overstress the market or unduly raise oil prices. They continue to press OPEC to open the oil taps to ensure incremental supply—but for now at least, that directive has been ignored.
A previous commentary on Venezuela (Oil Markets Taking the Longer View on Venezuela, for Now . . .) characterized Secretary Mnuchin’s assurances that the sanctions would have no impact as fundamentally flawed and we stand by that assessment. The nation’s electrical blackout caused Venezuela’s oil upgraders to shut down, and field operations (without on-site generation) were forced to curtail output. And while some of the production is likely to return as power is restored, ongoing challenges remain.
Sanctions are profoundly impacting the ability of operators to access financial markets, procure replacement parts, retain skilled workers, and maintain the integrity and safety of field operations. As a consequence, the longer the current political stalemate goes on—deepening an already catastrophic humanitarian crisis—the more steeply Venezuelan production is likely to decline. And the sustained/increased loss, coupled with the intentional removal of mid-grade Middle Eastern barrels, logistical constraints on Canadian supplies and minimal help from struggling Mexican production, the greater the pressure to grant (selectively) a new round of waivers for importers to secure Iranian oil.
The administration’s recent announcement of sales of oil from the Strategic Petroleum Reserve, while adding to overall supply, does little to help crude quality differences. Ironically, a likely beneficiary of all this mayhem will be Russia (shipping additional Urals blend barrels to Europe and even the United States, even as President Putin continues to support Maduro and Iran and Russia participates in the OPEC plus deliberations!
The net effect of this complexity and confusion is increased uncertainty for a market in search of stability and direction -poised to move but waiting on a signal and likely to overreact (in either direction) once that “signal” is perceived. Financials point to a recognition of tightening in physical markets and a decided bias to the upside with respect to price. Last Thursday, both WTI and Brent hit new highs for the year—based, in large part, on bullish sentiment regarding the OPEC cuts, concern over Iran and Venezuela, the Fed’s rate signals and rumors of an imminent trade agreement. By Friday morning, however, as economic fears resurfaced, the stock market declined, and oil prices retreated.
Uncertainty persists. For now, volatility appears to be the norm.
Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Larry Goldstein and Albert Helmig are senior associates with the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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