Generally buoyant oil prices are providing an upbeat backdrop to a major industry summit next week.
A mixture of geopolitical tensions and hopes that production curbs will be deepened have helped support the price and banish some of the gloom that descended on the oil scene earlier in the summer.
That said, a glance at price charts will show that the 12-monthly high was in early October, while the low for the year was seen in late December. A global economic slowdown coupled with increasing output from the US shale-oil industry creates an underlying fragility for crude prices.
Real price action last week
On Monday and Tuesday, the 14-nation energy cartel, the Organisation of Petroleum Exporting Countries (OPEC), will be meeting in Vienna alongside representatives from a supportive group of non-member oil producers, known as NOPEC.
A month ago, Brent stood at $70.11 on 27 May and WTI and $59.13, while three months ago, on 27 March, Brent changed hands at $67.83 and WTI $59.41.
The real action recently came last week, when Brent gained nearly $5 a barrel, bouncing from $60.94 on 17June to $65.20 on 21 June, while WTI moved up from $51.93 on 17 June to $57.43 on 21 June.
A year ago, on 27 June 2018, Brent traded at $77.62 a barrel, while WTI changed hands at $72.76. For both crudes, the 12 monthly high was on 3 October - $86.29 and $76.41 respectively – and both saw their low point on 24 December, at $50.47 and $42.53 respectively.
Ear to the ground
The OPEC-NOPEC deal, originally struck in December 2016 and extended since, has been critical in supporting the price. The most recent iteration of the agreement came into force in January to take 1.2 million barrels a day out of production.
This amounts to about 1.2% of total production, which has a powerful effect on the market – global supply and demand is very closely balanced, at about 100 million barrels a day, so apparently small changes in supply give oil producers more bang for their buck.
The agreement’s six-monthly lifespan expires on Sunday, hence the need to convene the OPEC meeting at the cartel’s HQ in Vienna. Arguments about the date led many to ask when is the OPEC meeting? This, in turn, undermined the price as it augured badly for the chances of agreements.
Now, however, the OPEC meeting date has been set for 1 and 2 July. As the OPEC meeting schedule is not known in detail at this time, market players and commentators will keep their ear to the ground to pick up indications of how it is progressing. The OPEC latest news will be picked over minutely.
At the start of this month, it seemed likely that sliding prices would generate gloomy atmospherics at the next OPEC meeting, and there were suggestions that any further production curbs may prove ineffective in the face of weakening demand and the US shale-oil boom.
But events since then have brightened the picture. Two oil tankers were attacked in the Gulf of Oman, and the Iranians shot down an American drone, leading President Donald Trump to prepare air strikes on Iranian targets. He later stood down his strike aircraft, explaining on Twitter on 21 June that: “On Monday they shot down an unmanned drone flying in international waters. We were cocked & loaded to retaliate last night on three different sites when I asked how many will die. 150 people, sir, was the answer from a General. 10 minutes before the strike I stopped it, not proportionate to shooting down an unmanned drone.”
Mr Trump added: “I am in no hurry…sanctions [against Iran] are biting.”
“Sovereignty and vital interests”
These sanctions, and a similar embargo against Venezuela, are supporting the price, as is a high level of tension between Saudi Arabia and Iran, which are backing opposing sides in the civil war in Yemen. Earlier this month, Saudi Crown Prince Mohammed bin Salman raised the prospect of this proxy struggle coming closer to home, saying his country wanted peace “but we will not hesitate to deal with any threat to our people, sovereignty and vital interests”.
These may well be needed if, as forecast, world growth slows down. In April, in its World Economic Outlook, the International Monetary Fund (IMF) wrote: “The global expansion has weakened. Global growth for 2018 is estimated at 3.7%, as in the October 2018 World Economic Outlook forecast, despite weaker performance in some economies, notably Europe and Asia.
“The global economy is projected to grow at 3.5% in 2019 and 3.6% in 2020, 0.2 and 0.1 percentage points below last October’s projections.”
The state of the world economy is top of the agenda at this week’s meeting of the Group of 20 leading economies in Osaka, Japan. Prime Minister Shinzo Abe, welcoming the G20, said: “At the Osaka Summit, Japan is determined to lead global economic growth by promoting free trade and innovation, achieving both economic growth and reduction of disparities, and contributing to the development agenda and other global issues.”
“New American energy era”
But if Mr Trump’s belligerence is helping to support oil prices, the President himself is determined to keep prices down, both by increasing shale-oil production and by exerting pressure on OPEC to limit any output cuts. With an election year looming, the White House does not want American motorists feeling the pinch.
On 13 March, US Energy Secretary Rick Perry spoke of a “new American energy era” that would result from Mr Trump’s strategy. In words unlikely to have cheered OPEC, he said: “Last year at this time, the US was the world’s number-one natural gas producer. Now we’re the world’s number-one oil producer as well.
“And between now and 2025, the United States will contribute an estimated one-half of the world’s growth in oil and gas production.”
He added: “We expect to become a net energy exporter next year, and for the next 30 years.”
The most recent OPEC monthly oil-market report stated: “As we have experienced over the past two years or so, maintaining a balanced market and sustainable stability requires all hands on deck. We need to ensure we have an understanding of the coordinates to help navigate an appropriate course for the second half of 2019.”
It added: “We remain vigilant of any possible gathering storm clouds, and while continuing to take a measured approach, given conflicting data, and the ever-evolving market situation, we will also not shy away from taking decisions, as we have already shown.”
In total, 25 countries are involved in the agreement. OPEC includes, along with Saudi Arabia and Iran, countries including Angola, Iraq, the United Arab Emirates, Nigeria, Kuwait and Libya.
The NOPEC group takes in Russia, Oman and Azerbaijan, host of a recent meeting of the OPEC-NOPEC monitoring committee, which oversees compliance with the agreed production quotas. Other members include Mexico, Malaysia, Kazakhstan, Brunei and South Sudan.
In the past, OPEC quotas have been rendered less effective by cheating by members pumping more oil than they had agreed, in order to enjoy a free ride on the back of other members’ output restraint. But the Azerbaijan meeting heard that compliance with quotas was running at about 90%.
Among the items of OPEC latest news that will be scrutinised will be any update on this figure.