Russia Signals End of Oil Output Cap as OPEC Warns of Shrinking Surplus

by Ship & Bunker News Team
Tuesday October 16, 2018

The Organization of the Petroleum Exporting Countries (OPEC) on Tuesday joined the growing ranks of crude analysts who of late have offered conflicting views about the state of the global market - and in OPEC's case, earlier declarations that the market is well supplied have been replaced by warnings that global spare oil capacity is shrinking.

Mohammad Barkindo, secretary general for OPEC, on Tuesday urged oil producing companies to increase capacities and invest more to meet future demand, since "Countries that are holding spare capacity are now shrinking because there has been less investment in exploration."

He added that the global oil sector needs about $11 trillion in investment to meet oil needs in the period up to 2040, and that India is expected to account for about 40 percent of the overall increase in global demand for that same period.

In fairness, Barkindo reiterated an earlier claim that "the market remains well supplied" and that "the projections for 2019 clearly show a possible rebuild of stocks"; however, it's questionable if one can genuinely argue that the current market is healthy if indeed spare capacity is shrinking.

One thing is certain: OPEC is going all-out to increase production in order to compensate for loss of Iran crude exports under the U.S. sanctions, even though Barkindo has repeatedly expressed concerns that any radical increase in output could send the global market into oversupply next year (which again invites a challenge to the veracity of his claim that spare capacity is in trouble).

Russia seems to be less concerned than Barkindo about the state of the crude market: on Tuesday Vadim Yakovlev, deputy chief executive for Gazprom Neft, said that his company's production has returned to record levels of 2016 before the former Soviet Union entered into the deal with OPEC to reduce output from the start of 2017.

He remarked, "The instructions we are getting from the government is that we can restore the levels before restrictions were enrolled," and that "There are signs the oil market is overheating."

Russian oil production reached a post-Soviet record of 11.36 million barrels per day (bpd) in September, and president Vladimir Putin said his country could add another 300,000 bpd to its output next year.

But presumably in show designed to reinforce its image as a responsible participant in the global energy sector, Alexander Novak, energy minister for Russia, discussed the oil output cap agreed between OPEC and non-OPEC countries with his Iranian counterpart Bijan Zanganeh, at a meeting in Moscow; his ministry said they spoke about the possibility of further oil output regulation but declined to give any details.

Crude market analysis, which is speculative at best, has been muddied of late by normally reliable experts such as JP Morgan and Goldman Sachs, which Bloomberg recently reported has made numerous about-faces in its forecasts of late.