As the US sanctions on Iran loom, the panic in the market over the loss of Iranian crude is increasing. Worse yet is that OPEC countries are not producing as much oil as they have promised, according to media reports of internal documents.
OPEC and its allies, known as OPEC+, have promised to supply the market with an additional one million barrels per day (bpd) since June, but that promise is still work in progress as not all members were able to deliver on their promises, or demand isn’t yet there for that much crude.
The important question now is: Does the market still need that one million bpd, or is there no need for all that crude? Looking at the demand outlook from the latest monthly oil reports from OPEC or its arch rival the International Energy Agency, the demand in early 2019 may not be there for all that crude with the US trade war affecting economic growth and industrial activity in China, the world’s largest importer of crude oil.
Demand, however, will still increase from North America, India and other regions in Asia. There are new refineries coming online in 2019 and that is good news for demand. India is also working on enlarging its strategic petroleum stocks and more crude will go to India next year as it’s one of the biggest clients for Iranian crude.
All countries have already finished nominating crude allocations for their customers for December. The picture is clear, then. OPEC+ needs only the amount of crude that customers will cease to buy from Iran. As of today, Iran’s exports are down by 700,000 to 800,000 bpd. In November it will be clear how much Iran will lose in the market because of the sanctions, although it’s hard to imagine a full halt of Iranian shipments by Nov. 4, the date the sanctions will go into full effect.
Many are still buying from Iran and they will keep buying, but at reduced volumes because it’s not easy to outsource the same quality of crude oil in the market. Iran is a producer of medium and heavy crude that is sour — it contains higher sulfur content than other types. Also, there is the issue of Iranian condensates — a form of very light oil — which is still processed in some places in Asia.
Countries such as Saudi Arabia already took all the measures to ensure that the market will be well-supplied. The country increased the amount of crude it is storing in its tanks abroad in Egypt, Japan, and the Netherlands. It’s hard these days to keep track of how much each country is producing because there are multiple sources in the market ranging from official to secondary sources to ship-tracking agencies.
The only countries able to produce more at the moment are Saudi Arabia, Russia and, to a lesser extent, Iraq. That’s why the US is working closely with Saudi Arabia and Russia during this crisis through their energy ministers.
Wael Mahdi
So for the sake of simplicity, I will rely on the numbers I found from one of the famous oil-tanker tracking agencies. According to its numbers, Saudi output went from 10.09 million bpd in May, before OPEC+ decided to pump more crude, to 10.9 million bpd in June. Output fell to 10.3 million bpd in July and stayed fluctuating around that level until last month when Saudi fields produced 10.28 million bpd. This month output will go up again to 10.7 million bpd, according to Saudi energy minister Khalid Al-Falih, and it may go up again in November.
Saudi output, however, doesn’t reflect the overall picture in OPEC, which increased production from 32.39 million bpd in May to 32.74 million bpd only in September. Looking at these numbers gives the impression that OPEC cannot deliver on its promise to increase its production by one million bpd. However, that one million is a hypothetical number used to show how much additional crude is needed to bring down the compliance level of OPEC+ with pledged cuts from 123 percent in August to 100 percent agreed on in the deal.
The internal document prepared by OPEC’s Vienna headquarters for a technical panel meeting on Friday and leaked to the media showed that OPEC members, excluding Nigeria, Libya and Congo, pumped an extra 428,000 bpd in September compared to May. The non-OPEC nations cooperating with OPEC had pumped an extra 296,000 bpd since May, the OPEC document showed, according to Reuters. Russia increased output by 389,000 bpd, although Kazakhstan, Mexico and Malaysia posted declines.
It will not be an easy balancing act for OPEC+ for two reasons. First, non-OPEC producers in the agreement cannot produce more, and that is affecting the overall compliance level. Second, the amount of effective spare capacity is becoming limited and that leaves the market with a smaller cushion as more output is expected to fall from Iran and Venezuela, and who knows who else, maybe Libya or Nigeria or any other producer.
The only countries able to produce more at the moment are Saudi Arabia, Russia and, to a lesser extent, Iraq. That’s why the US is working closely with Saudi Arabia and Russia during this crisis through their energy ministers. And that’s another reason why the US needs to ensure that Saudi Arabia can keep pumping crude at its highest capacity. Any political situation these days should be dealt with away from disrupting oil flow to the market, otherwise a $100 oil price will haunt the market.
- Wael Mahdi is an independent energy commentator specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi