At the start of the year it seemed obvious to me and many others that oil in the coming 12 months would be a story of two cities, Riyadh and Moscow.
Now, however, as the year draws to a close, it appears that oil in 2018 was an American story — and will continue to be so next year.
Why is that? Mainly because outside the Organization of the Petroleum Exporting Countries (OPEC), only the US is able to influence the market and prices. Whether through political means or production capabilities, the impact of the US was paramount, with tweets from US President Donald Trump moving the markets.
The US leader’s impact on prices was clear to such an extent that Mohammed Al-Rumhy, Oman’s oil minister, described the price movement in reaction to Trump’s tweets as a “Washington premium.”
Ironically, after every meeting or major statement, OPEC officials monitor Twitter closely, waiting for Trump to show his approval or disapproval of their policies.
Why is that important? The US is applying tremendous political pressure on OPEC as the president seeks lower oil prices. That is not all. Equally important is the political guidance OPEC needed to understand the atmosphere in Washington, with many US legislatures lobbying to approve a bill that will label OPEC a cartel and, therefore, subject it to anti-trust laws. The same regulations were used at the start of the previous century to break up the Standard Oil empire built by John D. Rockefeller.
In fact, some of the panic in the market last week followed news that the Justice Department was formally reviewing anti-trust laws to give US lawmakers the power to sue OPEC since it contributed to higher oil prices for American consumers.
Blaming OPEC for high prices at the pump isn’t new for US politicians.
Wael Mahdi
Blaming OPEC for high prices at the pump isn’t new for US politicians, but it doesn’t do OPEC any justice either.
The economy of the US lower states flourished during the shale boom. However, it is fair to say that without OPEC’s policies, the boom is highly unlikely to have taken place. In fact, the US economy in the pre-shale period was very different to that afterwards.
The US economy benefited greatly from high oil prices, with only consuming states finding it difficult to cope. But as oil prices went up, so did US production, and the increase in output contributed to lower gasoline prices. Therefore, US lawmakers should look at the many economic benefits the country enjoyed during the shale boom, including lower unemployment rates.
The issue that few understood until now is that the oil market needs stability in all forms and too much political interference does nobody any good. The shale boom will continue and next year the world might see the US hit a record for production at 12 million barrels per day. That demands a new approach from OPEC and its allies, known as OPEC+.
The OPEC+ alliance will meet next month and needs to agree on a way forward both for 2019 and the longer term.
As for the long term, a new framework is under discussion and will be presented to the 24 ministers attending the meeting on Dec. 7. As for 2019, the alliance needs to continue to be a swing producer and consider balancing the market further.
Balancing the market means not only cutting production but also raising it if necessary. However, there are a few unknowns the OPEC+ alliance needs to deal with at this time. These are a product of the US.
First, the full extent of US sanctions on Iranian oil exports is unclear following the Trump
administration’s move to give temporary waivers to Iran’s biggest customers.
Second, oil demand remains unknown because of the impact of US trade policies on global economies.
Third, there is the amount of oil that shale oil regions will release next year. So far, the numbers are bullish, but there are a few risks to the downside, such as the readiness of pipeline capacity expansion. It is true that there are more than 8,000 drilled, but uncompleted, wells that may contribute to another wave of shale supplies, but that doesn’t mean output from all these will be unleashed.
In order for OPEC+ to succeed at its next meeting, more understanding, coordination and cooperation with US officials and its oil industry is needed. Otherwise, the alliance will be making decisions in the dark. Is that happening? Will it happen? Is there time for that? These are the important questions for now.
-
Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi