OPEC has lost the oil market control. Actions (or tweets) of three people - presidents Donald Trump and Vladimir Putin and crown prince Mohammed Ben Salman - will identify the oil price action in 2019 and beyond. Although, obviously, each of them has different goals.
As long as OPEC members try to obtain a common position, the United States, Russia and Saudi Arabia dominate the global supply. Together they produce more oil than 15 OPEC members. All of the three countries pump oil with the highest pace on record and each of them can increase the oil output next year, though not all of them could make such a decision.
The market monsters.
Exactly these countries - Saudi Arabia and Russia - pushed OPEC+ in June for weakening the output restrictions which were imposed since early 2017. Both countries have increased the overall production to record high levels. At the same time, the output volume unexpectedly surged in the United States, as companies pumping oil in Texas Perm Basin have overcame difficulties with pipeline dlivery to the Mexican Shale coast.
That growth, together with a small decrease in demand forecasts and President Trump’s decision to free some of the Iranian oil buyers from sanctions, changed the market players’ sentiment - concerns about the sup0ply shortage have turned to excess delivery issues in the upcoming three months. Crude oil inventories in OECD countries, which were decreasing since the beginning of 2017, are growing again, and, probably, will exceed their five-year average when October’s data will be published, according to the International Energy Agency.
Ben Salman needs oil income to finance his ambitious plans for restructuring Saudi Arabia, trying to avoid concerns of those who will struggle from the process. The International Monetary Fund forecasted that the kingdom needs oil price at the level of $73.3 per barrel next year to balance its budget. The production cut prolongation for the third year is the only way to get the price which he’s willing to.
Although, he will face challenges from Trump and Putin. Russian President did not show any enthusiasm regarding the production cut. Russian budget depends on the price of oil much less than it was when the country agreed to join OPEC’s efforts to recover the oil market balance in 2016, while oil companies in the country want to keep extracting oil in the fields they invested in.
Putin can still decide that keeping positive relationships with Ben Salman is worth of a small sacrifice. Although, it’s not guaranteed that Russia will agree for the production cut extension when producers will gather in Vienna next month. Putin said that the price around $70 is ‘rather acceptable’.
A threat for Saudi’s plans might be even larger from Texas rather than from Trump’s tweets. American producers have enlarged oil output in a volume equivalent to Nigerian production for the last 12 months. Their overall volume might exceed 12 million barrels per day by April 2019, according to Energy Department. That’s a half-year earlier than it was predicted just a month ago and it’s 1.2 million barrels more than it was expected in January.
Saudi Arabia would have to take the risk of Trump’s anger, Putin’s indifference and the shell production growth in the U.S. if the country hopes to balance the oil market in 2019.