On December10th, 2016, the oil industry witnessed a ‘miraculous marriage’ titled ‘Declaration of Cooperation’ between the members and non-members of the Organisation of Petroleum Exporting Countries (OPEC). The sole aim was to stabilize the global oil market, balance stocks and protect future investments. Last week the cooperation turns one year. Our Business editor, Hamisu Muhammad reviews the ‘marriage’ and how long it would last.
The volatility in crude oil market was at its worst in recent times. Oil prices went so low that many commodity-exporting countries went into recession and some major oil companies’ diverted from many fields and withheld investments due to the low prices. The downward trend stayed for an abnormal period and divestments lingered for two consecutive years.
According to the United States Energy Information Administration (EIA) Crude oil prices ended 2015 below $40 per barrel (b), the lowest level since early 2009. Spot prices for the Brent averaged $52/b in 2015, 53% below the level in 2014 and 49% below the average price over 2010-14. Spot prices for West Texas Intermediate (WTI) crude oil were also down 53% in 2015 compared with 2014, averaging $49/b for the year.
EIA said lower crude oil prices in 2015 reflected the sustained excess of crude oil supply over global demand. As a result, global crude oil and other liquids inventories increased steadily through the year. Global inventories increased in each quarter of 2015, with a net inventory build of 1.72 million barrels per day, the highest rate since at least 1996.
Worried by the trend, the OPEC under the leaderships of the Secretary General, Mohammed Sanusi Barkindo and President of the OPEC conference, Khalid A. Al-Falih, Minister of Energy, Industry and Mineral Resources, Kingdom of Saudi Arabia, commenced series of initiatives among which was cooperation between stakeholders specifically, OPEC and non- OPEC members, oil producing companies, IMF/World bank and consumer nations in order to get to the root of the crisis.
At the meeting held on November 30th, 2016, the OPEC member-countries adopted an agreement reached in Algiers, the capital of Algeria earlier in the year, to cut 1.2 million barrels a day as a sign of fresh commitment by members to rebalance the market. This type of commitment was not seen in about 8 years. But the amount was not enough to stabilise the market without additional cut from non-OPEC members who also suffered the same unrest by the overstocking crisis. Immediately after the OPEC cut agreement the OPEC management commenced consultation with non-OPEC group led by Russian Republic. The aim was to convince them to reduce about 600,000. Mr Bakindo and other top officials conducted several meetings and visits to some non-members countries for the collaboration before they were convinced.
Russia who was regarded as a leader of the non- OPEC producer group on December 10, 2016, led other nations such as Azerbaijan, Kingdom of Bahrain, Brunei Darussalam, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Sultanate of Oman, Republic of Sudan, and Republic of South Sudan to a major deal tagged ‘Declaration of Cooperation’ was signed by OPEC with 11 non-OPEC nations which brought to the total of 1.8 million bpd cut out of the global oil market effective from 1st January 2017.
Since the commencement of the cooperation between the two groups, the market has been witnessing progress in terms of price stability and investment is slowly returning to the industry.
At a dinner to celebrate the one-year anniversary of the cooperation between the two groups, Secretary General of OPEC Barkindo said the cooperation came at a time it was needed the most. He congratulated all for participating in the Declaration of Cooperation, “which supports our shared goal of market – and global economic – stability. The record-high levels of conformity over the past year are the best indicator of your commitment to this common cause.”
Al-Falih while opening the Anniversary Dinner, celebrating the ‘Declaration of Cooperation said “I would also like to recognize the deeper relations between OPEC’s member Countries and the non-member countries that have joined the historic decision. I want to recognize the tireless work of my friend Alexander Novak towards this effort.
“From the very beginning of consultations last year, we began to see the contours of a new working relationship emerging, which led to the forging of a new consensus. And through our subsequent interactions – particularly through the valuable work of the Joint Ministerial Monitoring Committee – we have made steady advances towards institutionalizing OPEC and non-OPEC collaboration.”
Beside the diplomatic benefits, there technical benefits of the cooperation were more visible to the industry where crude oil in floating storage is also down by an estimated 50 million barrels since June this year, and the drawdown applies broadly to all regions, including both crude and products. In fact, products are already at their five-year average.
The industry has also witnessed the market structure flipping into backwardness for both Brent and WTI for the first time since 2014, indicating the market’s gradual move towards a more balanced condition. “All in all, market stability has improved and the sentiment is generally upbeat. The rebalancing trend has accelerated and inventories are on a generally declining trend.” Al -Falil said.
While commenting on the extension of the production cut agreement between the two groups, Novak said he strongly believes that the cooperation is working and working very well and therefore the extension is necessary in order to achieve better results in the near future.
The marriage not only stabilized prices but made them to appreciate by about 35 percent since the agreement was reached. As of Decmeber 22, the brent crude was at $65.3 while the WTI was at $59.05/b.
At their recent meeting this week, the Joint Ministerial Monitoring Committee (JMMC), a committee set up by both groups to monitor compliance said as of November 2017, the OPEC and participating non-OPEC producing countries achieved an impressive highest conformity level of 122 per cent, following the pattern of high performances in the past months.
“This, coupled with the aforementioned amendment of the Declaration of Cooperation, is an unequivocal demonstration of the steadfast commitment of participating countries to continue working towards the achievement of the goal of rebalancing the market and putting it on a sustainable stable footing.” The committee said.
The JMMC expressed great satisfaction with the results and sustained level of high conformity with the voluntary production adjustments, and encouraged all participating countries to achieve full conformity for the benefit of producers and consumers alike.