The Future of Global Energy
By Nyonga Fofang on July 2, 2018
OPEC keeps up its attempts to manage oil price fluctuations amid an unpredictable global trade environment.
The close of the recent OPEC meetings in Vienna, Austria, were a bit anti-climatic for some of us. Delegates saw the session close with a continuation of the ‘Declaration of Cooperation’ – an agreement to coordinate crude production and supply, and indirectly attempt to manage oil price swings.
The meeting began against the backdrop of a potential no-deal Brexit deal, and fall-out from America’s unilateral departure from the Iran nuclear agreement and its potential geo- political ramifications, given the fact the Iran is a major oil producer. OPEC and non-OPEC members met amid a cacophony of noise from politicians and business leaders, primarily from the United States, China and India, asking for oil prices to be brought down and for producers to prevent another situation that could hurt the global economy.
A little over two years ago, we saw the precipitous fall in the price of crude within a very short period of time. The oil price went from from $107 in June 2014 to below $28 per barrel of Brent crude in February 2015 – the biggest price reduction in 12 years. The ensuing ‘lower for longer’ oil price from 2014 to 2017 had a massive negative impact on many oil producers, including those in Africa. This extended to an array of oil services companies, suppliers and the builders of related infrastructure. In those challenging economic conditions, with reduced access to traditional funding, markets were noticeably unstable, making investing in the oil sector difficult. Nevertheless some major oil producers did continue to pump oil and re-invest, while those projects that couldn’t break-even at the low oil price range stalled or had to be mothballed. Most investors without clarity on their potential return on investment sat on their cash.
The current price of oil has been driven by a combination of factors, including a drop in Venezuela’s output; high oil demand from China and India; and generally from steady economic development in other Asian countries. The upward swing in oil prices is likely to continue, with the US focusing its efforts on isolating Iran, both politically and economically, hence disrupting supply.
The stability or instability of the market seemed to be major motivating factor that influenced the recent OPEC gathering, and influenced the desire to find a way of extending cooperation. Another motivating factor was the re-introduction of trade barriers, through higher tariffs introduced by the US and retaliation by affected countries. According to some panelists, this new market environment is creating a lot of instability, and the lack of predictability is damaging in the long term. This is leading to a call for constructive market intervention schemes.
The challenge is dealing with supply overhang from primarily large producers. At lower prices, many small producers feel the pinch, with lower revenue streams and stalled projects. While generally good for consumers and larger economies like India, China and others, it certainly isn’t sustainable for the long run. The absence and influence of Venezuela and Libya means that large producers like Saudi Arabia and non-OPEC parties like Russia will hold sway, irrespective of price swings. Regarding the issue of market unpredictability, the Saudis called for elastic sensibility from other members when it comes to production quotas. In other words, though influenced by sovereign obligations, producers will need to be flexible in their attempts to comply with OPEC’s agreement to control production.
At the moment, the continuous rise in the oil price and increased global trade tensions are creating a narrative where investment capital is paranoid about long term focus – especially in developing or emerging markets.