Next year marks the 10th anniversary of the global financial crisis, which temporarily sent oil prices into a tailspin.
By the end of 2008, a deep recession had pushed the cost of a barrel of crude down to $40 a barrel. However, by the end of the Noughties there were signs of economic recovery in much of the world and it swiftly recovered, to move back over $100 a barrel.
There followed more than four years of relative calm, in which the price moved between $100 and $125. This period of stability petered out in mid-2014, when North America’s increased output of shale oil and gas began exerting new downward pressure on prices.
Members of the producers’ cartel the Organisation of the Petroleum Exporting Countries (Opec) discussed scaling back output in response. But these plans were scuppered by the lack of consensus on how far and how fast production should be reduced.
Supply versus demand
Opec’s reluctance to rein in output came at a hefty financial cost. The quota system members had adhered to was abandoned as Saudi Arabia – effectively the cartel’s leader – ramped up its own exports.
Oversupply boosted global stockpiles of oil, while demand from many major economies remained muted. The improved fuel efficiency of many vehicles added to the glut. Prices dropped by 50% and more. By February 2016 oil traded for as little of $27 per barrel, which proved to be the nadir.
After a two-year supply glut, the latter half of 2016 saw Opec members regain a degree of unity. Agreement on production cuts was finally reached in November, while a non-Opec member – and major producer – Russia overcame its suspicion of the cartel and agreed to join the initiative.
The cutbacks, introduced at the start of this year, were initially scheduled to continue for a period of six months. In May, it was agreed that the cuts would be extended up to March 2018 as other non-Opec producers agreed to follow Russia’s lead and curtail their own output.
The big question
How long can the consensus last? The answer to that could now lie with Russia, which a year ago overtook Saudi Arabia to become the world’s largest producer of crude.
President Vladimir Putin wants to prolong the deal with Opec and in October said that he supports extending it through to the end of 2018. However, Russia’s major oil companies don’t share his view. They’re keen to step up production next year.
Putin has got his way for the time being though. Opec members met in Vienna on November 30 and agreed that their production cut – representing 1.8 million barrels per day – will remain in force beyond next March for at least most of 2018.
The deal was achieved despite several dissenting voices. However, prices have been edging upwards in 2017, with Brent crude recently selling at just over $60 a barrel. This seems to have convinced enough producers that limiting output has so far proved worthwhile.
A delicate balance
The dilemma for Opec members – and other longstanding oil producers – is that they’ve lost much of the power they exercised back in the Seventies, when two major oil crises shook the world.
The emergence of shale producers in the US and Canada has weaned both those countries off their dependence on oil imports. What’s more, each time the price strengthens so does the economic case for developing more new North American production fields.
Author Daniel Yergin, a specialist on the history of oil has forecast that: “The US is going to give Saudi Arabia and Russia a run for their money in terms of being the world’s number-one oil producer,” – a scenario that would have been regarded as fanciful even at the start of the current decade.
So Saudi Arabia’s dream of seeing oil back at $100-plus per barrel – both to close a yawning gap in its social budget and help next year’s planned sale of a stake in state-owned Aramco to international investors – looks likely to be disappointed.
Indeed, part of Crown Prince Mohammed bin Salman’s reforms is to lessen his kingdom’s dependence on oil revenue by investing proceeds from the sale in other sectors, ranging from technology to tourism.
An unlikely goal
In May this year, Saudi finance minister Mohammed al-Jadaan said that the kingdom’s plans to put money into artificial intelligence, automation and renewable energy mean that by 2030 it “wouldn’t care if the oil price is zero”.
As the Financial Times commented, that’s hard to believe. The petroleum sector still represents 87% of government revenues, so “Saudi Arabia could not afford to make a rapid shift from oil, even if it wanted to.”
What’s more, Aramco’s hefty valuation of $2 trillion is only realistic if investors are convinced that Saudi Arabia’s vast oil reserves will continue to be a valuable resource in the future.
Full details on Aramco’s initial public offering – billed as the biggest IPO ever mounted – are due to be released over the weeks ahead.
Predictions for 2018
Will Opec’s resolve to limit production levels hold firm into the new year? Analysts at Goldman Sachs appears to believe it will.
Last week Goldman published its latest research note, in which it raised its 2018 Brent price forecast to $62 a barrel and its projection for the lighter grade West Texas Intermediate (WTI) to $57.50 a barrel. Its earlier prediction had been $58 a barrel for Brent and $55 for WTI.
“Of course, risks remain and we see these as skewed to the upside into 2018 on the risk of an over tightening, either because of new disruptions, demand exceeding our optimistic forecast of Opec letting the stock draw run hot,” said Goldman analysts.
Yet opinion is divided. Opec has done much this year to reduce the global surplus of oil and seems confident that the supply glut will be largely used up by the end of 2018.
The Paris-based International Energy Agency (IEA) thinks differently. It expects American shale production will be more than enough to ensure that supply keeps up with demand, keeping stockpiles pretty much unchanged.