Syed Rashid Husain
A new world energy order is in the making, as crude markets are in the midst of major structural changes. Marked with glut, oil markets today are not the same, as they used to be until recent past. And major stakeholders are already taking note of this changing landscape.
Early in the week though, as markets were seen losing some of the gains of the recent weeks, it receiving unanticipated boost from forced outages. Unplanned supply disruptions have been a hallmark so far this year, having contributed to a tighter oil market than was otherwise expected.
With Canadian wildfire spreading, a militant attack on a Chevron Corp. platform off the Nigerian coast, shuttering the facility, instability in Venezuela leading to estimated output tumbling 6.8 percent to 2.59 million bpd in the first quarter compared with the same period of 2015 and the stalling US frackers, markets pared some of the earlier losses. This was but a phase in passing. Both WTI and Brent ultimately ended the week on a soft tone, with Brent down around 7% for the week.
For some of the major stakeholders, Riyadh included, in this emerging new energy world order, their central strategy - of managing global oil prices by regulating supply – and supporting prices - seem to have been discarded.
In a major shift, many now believe that targeting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, Reuters said, quoting sources familiar with the emerging view.
And they have a point. In recent years, oil markets have undergone key fundamental changes. New variables have made the global energy equations still more complex. The development of unconventional oil production from US shale deposits and other sources such as Canadian oil sands has made redundant the very idea that crude is a scarce and finite resource. Russia, which is not an OPEC member, has also contributed to the ample global supply. And now Iran is re-entering the fray and wants no strings attached to it.
This is causing some soul-searching within OPEC too. The producers’ group is split over how to respond to this. The split reportedly resurfaced at the long-term strategy meeting of the OPEC governors in London last Monday too, where they argued over if the group should keep targeting prices or not.
Iran, represented by its governor Hossein Kazempour Ardebili, has been arguing that this is precisely what OPEC was created for and hence "effective production management" should be one of its top long-term goals.
But Saudi Governor Mohammed Al-Madi reportedly said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so. "OPEC should recognize the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic," Al-Madi told his counterparts inside the meeting, sources familiar with the discussions were quoted by Reuters as saying.
"The market has evolved since the 2010-2014 period of high prices and the challenge for OPEC now, as well as for non-OPEC (producers), is to come to grips with recent market developments," Al-Madi emphasized.
OPEC has lost its power to shock, or indeed to influence global production of oil, and its price, much at all, most now concede. “The era of OPEC as a decisive force in the world economy is over,” Daniel Yergen pointed out while talking to the Financial Times recently. There are indeed reasons for this - from changing energy intensity and improvements in efficiency to the de-industrialization of major global economies - and from the growth of renewables to the advent of American shale and other new sources of non-OPEC supply. Realities have undergone a major change. Today, oil is just not as important in determining the ups and downs of the world economy as it used to be in past. OPEC has to understand the new reality and react accordingly.
Oil today is no more a scarce commodity. The oil debate and all its accompanying analysis used to be dominated by peak oil supply and the inevitable date when it would all run out. No longer. There is more oil today than the world knows what to do with and as soon as the wells start running low, new reserves are found or new ways of reaching them are invented. The supply of oil today is controlled by politics rather than geography and the gates of production are currently wide open.
And in the meantime, the issue of peak oil demand - the day the world uses as much oil as it ever will on one day - has entered the fray. Without any significant increase in demand, there is no point in increasing capacity. In the past, low oil prices used to push global demand much higher but today's rising vehicular efficiency, new technology and environmental policies have put a lid on growth.
Thus despite record low prices in the past year, demand is not expected to grow by more than 1 million barrels per day in 2016, just one percent of global demand.
This is a far cry from the past. Market dynamics were different then. At that point, producers’ were concerned more about maximizing their long-term revenues, even if that meant pumping fewer barrels and yielding market share to rival producers. Market share was not influencing and dictating the policy making then.
Things have but changed. With the importance of oil declining, it is now time to prioritize market share. Most producers hence are of the view that it would be better off producing more at today's low prices than reducing output, only to sell for even less in the future as global demand ebbs.
"The bottom line is that there will be no free riders anymore," Al-Madi thus reportedly said at Monday's meeting. "Some OPEC members should 'walk the talk' first," he told his colleagues.
"The oil industry is, relatively speaking, not a growth industry anymore," a source was quoted as saying. And this new reality seems very much guiding the emergence of the new global energy order. The issue of market share would dominate the global energy markets for a considerable period of time, one could say with some degree of conviction.
