Owing to the decrease in spare oil capacity worldwide, OPEC Secretary-General Mohammad Barkindo advised the oil-producing companies to enhance their production capacities and investments to meet the future demand.
Oil producers have reassembled this year on expectation that US sanction on Iran will strain supplies due to lowering consignments from OPEC’s third largest oil producer.
Brent crude breached four year high to reach $ 76 a barrel earlier this month, the highest since 2014.
Barkindo has stated that countries possessing additional capacity are now dwindling due to reduced investment in explorations. He also asserted that global oil sector requires about 11 trillion in terms of investment to meet future oil demand in the period up to 2040.
The import dependent countries including India are concerned about future oil supply. OPEC in its September 2018 report said that crude oil demand is expected to shoot up from 14.5 million barrels per day in 2017 to 111.7 million B/D by 2040. Saudi Arabia, the de facto leader of OPEC, is the only oil producer with substantial extra capacity on hand, which can be supplied to the market when needed and the Saudi plans to invest $20 billion in the next few years for possible expansion of its auxiliary oil capacity. Currently oil markets are adequately supplied and well-adjusted, said Barkindo but he has also warned against a potential imbalance in 2019 due to increased additional capacity created through heavy investments which subsequently might lead to higher supply.
However, OPEC is willing to maintain the balance that has been achieved after four years. Members of OPEC and Non- OPEC countries are planning for a supply reduction agreement that is now on course to reach 100 % compliance. OPEC and allied producers excluding US agreed in June to return to 100 % compliance with output cut that began in January 2017. This was after months of under production by Venezuela and other suppliers which pushed the adherence above 160 %.
Most interestingly, India is expected to account for 40 % of the overall increase in global demand during the 2040 forecast period as revealed by OPEC. Demand for oil in the world’s third largest oil importer is expected to rise by 5.8 million barrels per day by 2040. India is projected to witness the largest additional oil demand of 3.7 % per annum and the fastest growth in the period up to 2040.
Death of Saudi Arabia’s dissident journalist Jamal Khashoggi in Istanbul Consulate and the country’s admittance of the same after two weeks of denial has adversely affected the western relations of the powerful kingdom.
Riyadh provided no evidence to support its account of the circumstances that led to Khashoggi’s death and it was still unclear whether other governments would be satisfied with it. A Saudi – owned media outlet warned that the country will face disruption in oil production and a sharp rise in world oil prices.
Oil prices rose as traders assessed a threat by Saudi Arabia, the world’s biggest crude exporter, to retaliate against any punishment over the disappearance of Khashoggi – the government critic. Futures climbed as much as 1.9 % in New York as the market viewed the Saudi Foreign Ministry statement as a warning that the kingdom could use oil supplies as a political weapon. However, gains subsided amidst doubts that OPEC’s most powerful member would take such an extreme course and its energy minister promised that the Saudi will remain responsible supplier. US President Donald Trump has promised severe punishment, should Saudi Arabia be proved responsible for the disappearance of journalist Jamal Khashoggi. If Saudi uses their oil resources to hit back, it would be a break from their old policy of putting petroleum above politics.
“The market will price in some risk premium,” said Giovanni Staunovo, an analyst at UBS group AG in Zurich. “While Saudi Arabia has not used politics in recent years to deal with US however, prince Salman is not an ordinary politician and it is unclear how he will react going for forward. However, if Saudi Crude exports remain unchanged, this risk premium will disappear again.
Crude has retreated about 6 % after reaching a four-year high earlier this month as a darkening demand outlook, coupled with global stock market roots, which spurs investors to shun risky assets including commodities. Still traders continue to speculate whether OPEC and its partners can offset potential supply losses from Iran as US sanctions are set to curb oil exports from the Persian Gulf state.
West Texas Intermediate for November delivery rose delivery as much as $72.70 a barrel on the New York Mercantile Exchange $71.89. The contract slid to 4 % last week. Brent for December settlement climbed as much as $1.49 or 1.9% to $81.92 a barrel on the London based ICE futures Europe Exchange. Prices declined 4.4% last week, the biggest weekly drop since early April. The global benchmark crude traded at $9.44 premium to WTI for the same month. Khashoggi has not been seen since entering the Saudi Consulate in Istanbul on October 2nd. The US administration is said to increasingly regard the Kingdom’s denial of any involvement in his disappearance as untenable. Turks officials say they have audio and video recordings showing Saudi security team detaining the journalist before killing him and dismembering his body, according to the Washington Post.
OPEC’s top producer Saudi Arabia has taken on an even more crucial role as the market from key producers to make up for lost barrels from Iran to Venezuela. Although the kingdom did use energy as a weapon when it led an oil embargo in 1973 to 1974, its current threats mark a surprising turn in an otherwise warm relationship with the US. Although it would be premature to comment on sanctions and on any issue until US get further down the investigation and find the underlying cause of Khashoggi’ s death. Trump’s comment about the Khashoggi’s incident in recent days have ranged from threatening Saudi Arabia with “very severe” consequences and warning of economic sanctions, to more conciliatory remarks in which he has played up the country’s role as a US ally against Iran and Islamist militants, as well as a major purchaser of US arms. On Tuesday 23rdOctober, Turkish President Tayyip Erdogan said the person who ordered the death of the prominent Saudi journalist must be brought in to account. He said the case that has sparked outrage around the globe; Turkey would not complete the investigation into Khashoggi’s death until all questions are answered. The White house and the US department of State did not immediately respond to a request for comment on Erdogan’s remarks. US President Trump has repeatedly played down any suggestion that the crown prince was involved in the killing but also warned of possible economic sanctions. Thus, Khashoggi’s mysterious disappearance may affect the geo-politics of oil market and dynamics of global oil supply.
* I am grateful to my student Purva Rathore of the department of Economics for support to compile this article
