OPEC is enduring one of the most head-spinning years in its history, swerving from cutting oil production to boosting it as quickly as possible. Now it’s talking about reversing course again.
Ministers from the group gathering in Abu Dhabi this weekend will discuss the possibility of cutting production again next year, according to delegates, a move that would mark an abrupt end to six months of supply increases.
The group is responding to a worrying prospect: Even though U.S. sanctions on Iran are removing significant amounts of crude from world markets, a fresh surge of American shale oil threatens to unleash a new surplus in 2019. Some members are concerned that inventories are rising, said the delegates, who asked not to be named as the discussions are private.
Crude prices already reflect this. Brent for January delivery has retreated about 17 percent from a four-year high reached in early October. The Organization of Petroleum Exporting Countries and its allies are showing they’re worried, signaling last month that they might need to dial back near-record output levels.
“The message from OPEC looks like: fasten the seat belts,” said Bob McNally, president of Rapidan Energy Advisors LLC, a consultant in Washington. The cartel looks sets to “put pedal to the metal to boost production, and then immediately slam the brakes pretty hard and talk about cutting supply."
If the group, led by Saudi Arabia, does ultimately decide fresh cutbacks are necessary, it will confront a number of challenges. It will need to once again secure the support of rival-turned-partner Russia, which has less need for high oil prices. The two countries have started consultations on the matter, state-run Russian news service Tass reported on Wednesday. There’s also the risk of antagonizing the kingdom’s key geopolitical ally, U.S. President Donald Trump.
Powerful Forces
All this is a far cry from the usual OPEC mantra of preserving stability and careful market stewardship. Yet it does reflect the level of uncertainty in a market experiencing huge shifts in supply and demand.
Earlier in the summer, Brent surged above $86 a barrel as the risk of production shortfalls from sanctions on Iran and Venezuela’s economic collapse rattled the market. Losses from those two OPEC members threatened the biggest supply disruption since the start of the decade.
Yet big things are happening on the other side of the supply equation too, meaning the risk of scarcity may not last. OPEC has been in “produce as much as you can mode” to reassure consumers, Saudi Energy Minister Khalid Al-Falih said in Riyadh last month. The kingdom has lifted output close to record levels, while Libya is pumping the most in five years.