A lot can happen in oil markets between now and December 1

Global oil traders will be keeping a close eye on their screens in the run up to December 1, when Opec+ is scheduled to begin returning barrels to the market after more than four years of varying supply cuts.

Those new barrels had been scheduled to come back on October 1, until the Saudi and Russian-led organisation took heed of lower prices and an uncertain economic outlook and decided to delay the return for two months.

Since that decision, there has been a “Will they, won’t they, can they, can’t they?” tone to commentary, as experts argue whether the time will ever be right to put those barrels back – with an initial tranche of 180,000 rising monthly to 2.2 million over the following year.

The signals are that Opec+ will resume the supply increases two months from now. But remember the golden rule with Opec+ decisions – always expect surprises.

One important factor to note is that Opec+ does not require another full meeting of ministers from its member countries to proceed with an increase.

The Opec statement that announced the delay stated specifically that the so-called “Group of 8” countries that has been driving policy within the 22-member alliance said the cuts “will be phased out on a monthly basis starting December 1”.

There is, as ever, a caveat: the Group of 8 – Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman – retains “the flexibility to pause or reverse the adjustments as necessary”.

Just in the past week it has begun to look more likely that “flexibility” will not be necessary.

A report last week in the Financial Times, based on “people familiar with Saudi Arabia’s thinking”, stated that the kingdom is ready to “abandon its unofficial price target of $100 a barrel” to accommodate the new barrels.

“Unofficial” is the operative word here, because, as we know, stated Saudi policy is to pay little attention to crude prices and instead try to balance global supply and demand, in partnership with the rest of Opec+.

Saudi Arabia would probably be relatively comfortable if it ended the year with a dollar price that begins with 8

Nobody is really sure where the $100 a barrel “target” came from. The International Monetary Fund calculated Saudi needs an average of $96.20 per barrel to balance its fiscal budget. Others have calculated that as much as $108 a barrel is required both to balance the budget and contribute to the ongoing economic transformation under Vision 2030.

It is worth noting, however, that the cost of crude production in the kingdom is around $10 per barrel – among the lowest in the world – and so far this year it has traded at an average of more than $80.

That is short of the “unofficial” targets, but Saudi Arabia would probably be relatively comfortable if it ended the year with a dollar price that begins with 8.

The other reason for optimism that the return schedule will begin in December is a recent Chinese stimulus package that has gone some way to lifting the gloom over that country’s economy.

There is no direct correlation between increased consumer spending, which the package aims at stimulating, and the oil price, but anything that helps China to resume strong GDP growth is a positive for global commodity markets.

The rapidly changing geopolitical situation in the Middle East, on a knife-edge after the Israeli attacks in Lebanon over the weekend, may be expected to result in higher crude prices on supply fears, but markets seem to have been trading without any “risk premium” for some time now.

The consensus is that it will take a major escalation, and a threat to the Straits of Hormuz, to cause a serious spike.

It is impossible to say with any certainty how the oil security situation will develop over the next two months, and the same applies to the other big external factor, the US presidential election.

Of much more direct relevance to the December resumption will be how three of the Group of 8 – Russia, Iraq and Kazakhstan – progress on the thorny issue of overproduction.

Both Iraq and Kazakhstan have pledged to meet previously agreed compensation schedules and adjust their plans to take account of any recent overproduction. Russia, too, has promised it will tackle overproduction, but its timeline is as yet unclear.

If the overproducers miss their compensation targets again, that may throw all the Opec+ plans in the air.  

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE

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