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Opec Summit: Cut Expected to Balance Price Fall and Global Slowdown

Opec meetings are never simply about turning on and off the taps of the stuff that greases the world’s economy.

Opec meetings are never simply about turning on and off the taps of the stuff that greases the world’s economy. And when the Organization of Petroleum Exporting Countries meets on there will be more to discuss than oil prices.

Geopolitics also overhangs the Opec meeting. Donald Trump has consistently pushed for lower prices and cheered recent falls earlier this month.

Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!— Donald J. Trump (@realDonaldTrump)

Then there is the impact of the murder of Jamal Khashoggi on US-Saudi relations. That murder may have cost the Saudis some leverage on what to cut and how much, said Brian Youngberg, an energy analyst for Edward Jones.

Two months ago things looked very different. US crude prices touched three-year highs at $77 a barrel, and some oil traders were betting that prices could reach triple digits in 2019. Prices are down 30% from there, with Nymex West Texas Intermediate crude futures at about $50. The global benchmark, Brent crude, also fell about 30% and is hovering near $59. Even in the notoriously volatile energy markets, the price swings were stunning.

Mark Lacey, head of commodities and resources at Schroders, says several events caused prices to fall. He added the oil market is at a critical juncture.

“Just like the Opec meeting at the end of 2016, this meeting is going to be very, very important,” he said.

That’s when Opec pursued market share rather than price stability, hoping to kill the nascent US shale oil industry by flooding an already oversupplied oil market. US and Brent values eventually fell under $30. Global inventories were finally mopped up this year after Opec and Russia tempered production, allowing prices to rebound amid increased demand in a stronger global economy.

With Iranian sanctions looming, prices eventually rose to three-year highs, even as Opec stepped up production to meet the expected shortfall and US shale output was at a record. Higher prices didn’t sit well with the Trump, who lambasted Saudi Arabia and Opec more than once to lower prices.

When the White House began issuing waivers on the Iranian sanctions to key users like China and India, putting extra oil on the market, dynamics started to change. Forecasts for slowing global growth suggested oil demand might soften, too. Traders began to sell their bets for higher prices, and prices tumbled.

“There was a major shift in the perception of the market from, oh no, we’re heading into an undersupplied market, to, oh no, there’s actually too much supply,” said Norbert Ruecker at Julius Baer.

Derek Leith, global oil and gas tax leader at EY,added the market was caught off guard both by the price rise to $80, which led to ideas of even higher prices, and then the decision to allow sanction waivers, causing the whipsaw action.

Ruecker and Lacey expect Opec to cut output. To balance the market between supply and demand, Lacey says Opec could cut by 500,000 barrels a day, to 32.5 million – anything more than that would tip the market back into a deficit. He forecasts prices to rebound from current levels, and adds current demand outlooks are too conservative.

There are some similarities between now and the 2015 meeting – there is extra supply and the US shale producers are pumping at record levels. But that’s where it ends. The excess supply is much smaller than before, and the global oil industry is in cost-cutting mode, rather than expansion, Ruecker said.

Not everyone is convinced Opec will cut. Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions, says prices haven’t been down for long enough, and that the Saudis will want a better handle on future demand. “Usually they’re a bit more deliberative,” he said.

US shale producers are penciling in $55-$60 a barrel prices for their 2019 budgets, Youngberg said, where they can operate based on cash flow, having learned a harsh lesson in the oil crash.

Where analysts see prices may depend on their view of the global economy, Ruecker said. His three-month price for Brent is $72.50, with a 12-month forecast of $65, which reflects expectations for a slowing global economy by 2019.

Leith says Opec wants to balance oil output in a “sustainable way” between making money to allow investment and not squeezing consumers. That figure may be around $70 a barrel.

The winner right now? Consumers, Youngberg said, especially in the US, where gas prices in nearly two dozen states are sub-$2 a gallon. “It’s a very, very positive thing. There can be a silver lining. It may be painful for companies, but it can be beneficial for the consumer,” he said.