Oil markets seem to be heading to a state of instability, as oil supplies come under severe pressure in the coming months.
The world’s leading oil cartel seems also to be under pressure, as internal conflicts and possible in-depth cooperation with Russia could lead to a restructuring of the old giant.
The outcome of the JMCC meeting between OPEC and Russia has produced a diffuse result. Saudi Arabia, OPEC’s leading oil producer, and Russia seem to have rebuked U.S. president Donald Trump’s request to increase overall oil production to counter higher oil prices.
In a direct remark, Saudi’s minister of energy Khalid Al Falih stated that OPEC is not interested to increase prices as was stated by Trump.
The U.S. president even had warned to take action if the oil cartel continued with its so-called strategy to squeeze the market to gain higher revenues. The Algiers answer was clear, production won’t be increased, except if the market shows a severe tightening.
The cartel seems to be taking a very interesting position, as this means that OPEC and Russia will decide when to act and how to act.
At present, OPEC sees not yet a real need to supply additional volumes at all, as stocks are still above the 5 year average. Russia and Saudi Arabia repeated their claims that if needed they will be able to supply the additional volumes, as spare capacity is still available.
Oil traders still seem not to have reached a consensus on the future situation.
Optimism in Europe is bluntly contrasted by statements made by traders such as Mercuria and Trafigura, who have warned already that oil prices could spike to around $100 per barrel.
Not all signals, however, are bullish for oil. The escalating trade war between the U.S. and China, which could lead to a lower demand growth the coming months, could soften the pain and result in stabilizing oil prices due to lower demand growth.
At the same time, several emerging markets seem to be heading towards a possible economic crisis scenario.
Turkey, Egypt and others, are facing headwinds, while higher oil prices in combination with higher dollar exchange rates in markets such as India also are putting pressure on demand.
The Algiers meeting however has shown that the oil cartel is heading towards a potential existential crisis. The already well documented crisis between leading OPEC members Saudi Arabia-UAE and Iran is escalating.
The fact that Iran was not even attending the meeting showed that Tehran is not amused at all about the ongoing efforts of Saudi Arabia and Russia to fill in the gaps in supply expected the coming months.
Tehran has repeatedly warned both not to take advantage of the dire situation that Iran is facing the coming months. Moscow and Riyadh were quick to say that any supply crunch will be met by others accordingly.
For oil consumers, the coming months will be a rollercoaster ride not seen since the start of the financial crisis. A possible price hike, combined with economic uncertainty worldwide, will increase price volatility severely.
The potential risk of an oil price bump is high, but oil producers currently are smelling blood.
Continuing economic growth, even slightly tempered by the U.S.-China trade war and instability in emerging markets, is still strong enough to push demand above 100 million bpd in 2018.
Further global demand growth is expected, while supply growth is starting to slow down.