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Opec does two things well: produce oil and manage the market to its advantage. The cartel has long held that cutting production and keeping the oil price high beats selling more barrels at lower prices. So when the group — led by Saudi Arabia — announced a big increase in output, it left observers baffled.
All that oil will swamp demand. Opec+ — the name given to the cartel plus allies such as Russia — may add as much as 2.2mn barrels a day of supply by the end of September. Oil demand is set to grow by less than a million barrels a day this year, according to the International Energy Agency. Worse, non-Opec countries will grow their own daily production by 1.3mn barrels this year — much of it from long-life projects which do not stop gushing just because the oil price falls.
Unsurprisingly, that has sent the oil price sliding. It is down about 15 per cent this year to $65 a barrel. Saudi Arabia needs prices above $90 to balance its budget, according to the IMF.
Why would oil-producing countries want prices to fall? The strategic pivot may be a way to punish cartel members which have been producing more than they agreed. It might help damp the impact of any further US sanctions on Iranian oil. Low prices are also a gift to US President Donald Trump because they help American consumers.
Opec may not have to endure this pain for very long, though. Big companies from non-cartel countries such as ExxonMobil, Shell and BP have of late found relatively few new oilfields. Over the past five years, new non-shale discoveries have averaged at 2.5bn barrels a year — less than a quarter of the level of the previous three years, according to a Goldman Sachs analysis of the top projects in the sector.
Given the long lead times between drill bit success and production, oil majors are still growing output from earlier discoveries. But, after 2027, pumping from conventional projects will start to fall. Similarly, US shale oil, which has been a huge driver of supply growth, is expected to peak in 2027, according to the US Energy Information Administration, and then start to decline. Demand is hard to predict, but most observers expect it to keep growing until at least the end of the decade.
With rivals running out of juice, prices ought to rise eventually and the cartel will increase market share. For listed companies with shareholders to serve — notably BP, which has high debt and activist investor Elliott Management nipping at its heels — the current oil slump will be more painful. Among Opec’s many natural endowments is an ability to play the long game.
camilla.palladino@ft.com
