Despite a lot of bluff and bluster and gnashing of tweets, US President Donald Trump was unable to provoke a spike in OPEC oil supply at OPEC’s Algiers meeting over the weekend, says Richard Robinson, manager of the Ashburton Global Energy Fund…
OPEC’s power does not rest in the oil it produces, but rather in the oil it does not produce. Without spare capacity, OPEC is relatively impotent in relation to preventing rising prices.
Following four years of collapsing international capital spend, Trump’s removal of the world’s fifth largest oil producer, Iran, from the market – with sanctions to be fully implemented in November – was never going to end well.
Iran is now likely to focus on influencing oil prices in the only way left available, by disrupting supply from others and elevating the risk premium – hence the military exercises performed over the Strait of Hormuz over the weekend.
An early sign Trump was not going to get his way could be found in Saudi Arabia’s recent production and export data. In July, Saudi Arabia responded to one of Trump’s tweets calling for more oil by promising to push production to 11m bbld. But talk is cheap and the exercise of ramping up supply is never simple, so Saudi Arabia cut supply to 10.3m bbld.
Following Trump’s call for support from OPEC, the only country able to increase production significantly since July has been Libya. It increased production by 270k bbld, compared to Saudi Arabia’s decline of 140k bbld – and this could disappear in a heartbeat.
We believe the combination of tight supply, healthy demand, falling global inventories – down from already under-stored levels – and anaemic spare capacity helps support an oil price which could end the year above USD90.
In the event of a large supply disruption, both OPEC and the US – due to a lack of takeaway capacity in 2019 – will find it increasingly difficult to meet shortfalls next year. The world could then be faced with oil prices spiking back up to all-time highs circa USD120.
