I would like to begin by thanking Reuters for this generous invitation to speak at this important and timely Commodities Summit that is being held this week across its bureaus in London, Singapore, New York, Houston and Toronto. Even though my schedule did not permit me to physically be in London for this global forum, I am pleased to be able to share with you our perspectives in OPEC on the current dynamic oil market conditions.
When you listen to our contributions today, I will be at another important energy forum in India, a country that will be a central driver to global oil demand growth in the years and decades ahead.
This follows my attendance last week at the Russia Energy Week in Moscow, where I shared a speaking platform with President Vladimir Putin, and held talks with Khalid Al-Falih, Saudi Arabia’s Minister of Energy, Industry & Mineral Resources and the President of the OPEC Conference, Alexander Novak, Minister of Energy of the Russian Federation, as well as other OPEC and non-OPEC Ministers that are part of the historic ‘Declaration of Cooperation’.
These two almost back-to-back important energy fora, held at a critical juncture in the evolution of the current oil market cycle, underscores the importance OPEC attaches to dialogue and cooperation with both producers and consumers.
This is particularly relevant given the ongoing market rebalancing process that is vital to the sustainable market stability that both producers and consumers desire, and which is beneficial to the global economy as a whole. The best way to achieve this is to do so collaboratively, in consultation with other energy stakeholders.
This has been the focus of the landmark ‘Declaration of Cooperation’ and the production adjustments reached by OPEC and participating non-OPEC producers at the end of 2016 and then extended in May 2017, for a further period of nine months to the end of March 2018.
It has been a major commitment from 24 producing countries as we look to see the return of sustainable market stability.
We are now just over nine months into the ‘Declaration of Cooperation’. I could tell you that the process has been a straightforward one, but I think we can all appreciate that the rebalancing process was never going to happen overnight and it was never going to happen in a linear fashion.
To help contain, and then alleviate the current oil market cycle, has required great patience, resolve and perseverance. The cycle has been described by many as the worst they have ever seen in the history of the industry.
It is a cycle that saw the OPEC Reference Basket fall by an extraordinary 80 per cent between June 2014 and January 2016, the largest percentage fall in the six episodes of sharp price declines we have observed over the past four decades; where thousands upon thousands of jobs were lost; where many projects and investments were frozen or discontinued; and where many companies saw great financial and operational stresses.
We believe that developments this year have helped stem the industry’s haemorrhaging. It has put a stop to the industry being stuck in reverse.
Today, I believe we are seeing some concrete and tangible results. As the great Chinese philosopher, Confucius, once said: “The man who moves a mountain begins by carrying away small stones”.
We have every reason to be satisfied with the steady and ever-improving progress we have made in our collective efforts to overcome the challenges of the current oil market cycle. As I said in Moscow last week, it is “so far, so good”. There is clear evidence that the market is rebalancing.
The process of global destocking continues, both onshore and offshore, with positive developments in recent months showing not only a quickening of the process, but a massive drainage of oil tanks across all regions.
At the start of this year, the OECD stock overhang was at 340 million barrels above the five-year average. This level fell gradually in the first four months of this year to just below 300 million barrels. In the next four months, however, it fell by a huge 130 million barrels to stand at 170 million barrels above the five-year average for the month of August.
From this figure of 170 million barrels, 145 million barrels constitute crude and a mere 25 million barrels are products, almost converging with the five-year average.
Crude in floating storage is also down by an estimated 40 million barrels since the start of the year, with the help of a narrowing contango since June, and then Brent flipping into a clear backwardation from the second week of September. This trend will obviously make it unprofitable to continue to store crude.
These strong and positive signs are evidence that the fundamentals of supply and demand are gradually, but steadily returning to balance.
There are a number of factors why the rebalancing has recently gathered pace, including the unprecedented high conformity levels among the 24 participating nations in terms of the production adjustments; strong oil demand growth; and slower than anticipated growth in US tight oil supply.
Conformity levels to the production adjustments have been remarkably strong throughout the year. The 5th Meeting of the Joint Ministerial Monitoring Committee held on September 22 in Vienna confirmed the effectiveness of the ‘Declaration of Cooperation’, with the month of August hitting a remarkable overall conformity level of 116%!
It has sent a clear message to the market that countries that are part of the ‘Declaration of Cooperation’ have their eyes firmly on the goal of bringing back sustainable market stability.
Global oil demand growth has also been robust, with an estimated increase of close to 2 million barrels a day from the first to the second half of this year. Moreover, the OPEC Secretariat in our most recent Monthly Oil Market Report raised projections for oil demand in both 2017 and 2018. These upward demand revisions are most likely to be an ongoing trend.
In addition, we have recently seen a deceleration in US tight oil growth compared to the first half of the year, evidenced recently by the falling productivity of wells, particularly in the Permian, as well as growing concerns from the investment community.
While there are clearly a number of positives to point to in the rebalancing process, we also need to be cognizant that challenges remain.
This is particularly evident when we look at investment. While investments are expected to pick up slightly this year and in 2018, it is clear that this is not anywhere close to past levels and it is more evident in short-cycle, rather than long-cycle projects, which are the industry’s baseload.
The issue of a potential investment shortfall was a recurring theme at last week’s Russia Energy Week conference, with President Vladimir Putin, as well as many oil and energy ministers making reference to the critical investment challenge.
As we have all learned from previous price cycles, such pronounced and long-term declines in investments are a serious threat to future supply. But given our projected future demand for oil, with our upcoming World Oil Outlook 2017 expecting demand to reach over 111 million barrels a day by 2040, an increase of almost 16 million barrels a day, the world simply cannot afford a supply crunch.
Recognizing and respecting the link between long-term security of supply and short-term conditions is critical.
Let me assure you that from the perspective of the ‘Declaration of Cooperation’, all participants remain committed to fully achieving its goals and objectives. We will not waiver; we will not tire.
Our steely and resolute focus remains on reducing inventories, moving the stock overhang to its five-year average and ensuring sustainable market stability in the years and decades ahead. Thank you for your kind attention, and I wish you all a very successful conference.
- Being presentation by HE Mohammad Sanusi Barkindo, OPEC Secretary General, via video, at the Reuters Global Commodities 2017 Summit, 9 October 2017, London, U.K.