OPEC Ups September Production, Barkindo Declares Market Well Supplied

Thursday October 11, 2018

In the chaotic world of the crude market, a few days can make a world of difference for outlook: earlier this week the expectation of plummeting Iran exports causing a global supply tightening was still a white hot topic of analytical concern; on Thursday, following numerous reports of inventory builds and demand softening, the worry began shifting once more to oversupply.

The latest monthly report from the Organization of the Petroleum Exporting Countries (OPEC), shows that several of its members, led by Saudi Arabia and Libya, put enough new barrels on the market in September to offset a drop in production from Iran: the Saudis put an additional 108,000 barrels per day (bpd) on the market, while Libya contributed an additional 103,000 bpd.

This is compared to a 150,000 bpd drop for Iran; further, increases in Angola, Nigeria, and the United Arab Emirates also boosted OPEC's bottom line, to the total tune of nearly 32.8 million bpd up 132,000 bpd from August.

OPEC also warned that "Global economic growth remains solid, but is facing potential headwinds; while growth in the major [Organization for Economic Cooperation and Development] economies remains well supported, decelerating trends have become visible in some emerging markets and developing countries."

The cartel now thinks world oil demand will grow by 1.54 million bpd in 2018, down 80,000 bpd from its last forecast, and it raised its outlook for supply growth from non-OPEC countries by 200,000 bpd to 2.22 million bpd.

Armed with this information, Mohammad Barkindo, secretary general for OPEC, said on Thursday that although the oil market has been reacting to perceptions of possible supply shortages, "the market remains well supplied"; he also noted that "The projections for 2019 clearly show a possible rebuild of stocks."

However, Barkindo was also worried about the ability of producers to sustain high levels of output down the road, adding that "we are very concerned" about spare output capacity amid a reduction in energy-industry investment.

Unfortunately for Barkindo, Goldman Sachs pointed out on Thursday that energy companies and investors seem to be focused solely on generating profits at the expense of reinvestment: Andrew Fry, global head of energy at Goldman, said, "In the near term the focus is on returns as opposed to growth for the sake of growth."

Adam Brett, global head of natural resources advisory at HSBC, said that capital expenditure among the world's top oil companies is expected to rise to $140 billion by 2021 from the current $100 billion, but will remain well below the $200 billion spent before the 2014 oil price collapse: "For Big Oil, value will prevail over volume."

Earlier this year, Bernstein Research speculated that oil prices could eventually top $150 per barrel because energy companies' reinvestment ratio, which measures cash flow against investment in oil and gas exploration and production, is the lowest in a generation.