For more than two decades, Opec has tried to avoid repeating a mistake that cost it dearly. In November 1997, at a meeting in Jakarta, Saudi Arabia convinced fellow oil producers to boost output, ignoring a crisis brewing in emerging markets.
The output increase came at the worst possible time. What in November 1997 looked like a hiccup, by mid-1998 was a full emerging-markets crisis spreading to Russia and Brazil. Global oil demand growth slowed, in part because of an unusually warm winter in the northern hemisphere. Benchmark oil prices fell below $10 a barrel, the lowest since the 1973-74 oil embargo.
For Saudi Arabia, it was a painful blunder, and one that Organization of Petroleum Exporting Countries officials have vowed never to repeat. Now the group is facing trouble again in emerging markets. So far, it isn’t remotely similar to the 1997 crisis. And yet, signs abound of slower economic growth from Turkey to China.
“The balance of risk clearly indicates that the slowdown in the global economy would have by far the biggest impact on oil prices compared to supply shocks,” said Bassam Fattouh, director of the Oxford Institute for Energy Studies.
The oil ministers of Saudi Arabia, Russia and a handful of other nations are scheduled to hold a conference call at the end of the month to discuss the market. This is a new practice by the so-called Joint Ministerial Monitoring Committee, which includes ministers from both Opec and non-Opec countries, to oversee compliance with the production cuts agreed to in late 2016.
Brent fell to a four-month low of $70.30 last week – down about 13% from a peak of $80.50 in mid-May. The international benchmark was dragged lower by slower buying from China, higher Opec and Russian production and concern that trade wars will slow economic growth and cause global energy demand to contract.
Since 1997, Opec has become cautious about any sign of economic trouble. As the oil cliche goes, Riyadh was still haunted by the “Ghost of Jakarta”.
For Saudi Arabia, the turmoil in emerging markets is another complication in an already testy environment. Opec has sought to adjust production in response to the unknowns of the impact of US sanctions on Iranian crude and the collapse in Venezuelan output. The kingdom, according to people briefed by Saudi officials, would prefer to be cautious.
The wariness already explains why Riyadh cut production in July after hiking it in June, the same people said, asking not to be named discussing private conversations. Saudi Arabia told Opec it pumped 10.35mn bpd last month, down from almost 10.5mn in June.
Yet, while the turmoil gives Opec officials reason for caution, the economic outlook isn’t nearly as bad as it was two decades ago. Annual oil demand growth remains above the 10-year average. Moreover, refining margins, an indicator of consumption strength, are also healthy.
“The situation looks different for Opec today than in the 1990s,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “Prices have stayed strong until recently, and Opec has shown a flexibility and strong discipline that wasn’t the case back then.”
Back in 1997-1998, Opec was split, with Venezuela over-pumping and the group often flouting its own output targets. This time around, the group isn’t just stronger internally, but it’s also working with outside allies including Russia, Kazakhstan, Azerbaijan and Mexico.
The International Monetary Fund said in July that the pace of expansion in some economies has peaked. Still, the IMF said it expected global growth in 2019 at 3.9%, the same rate as this year. Chinese growth, however, will slow down to 6.4% from 6.6%.
The International Energy Agency is also cautions. For now, it has made no changes to its underlying economic and oil demand assumptions it said earlier this month. But it said that demand growth ease later this year and in 2019.
Since the IMF and the IEA published their views, emerging-market currencies, equities and bonds have weakened, increasing risks to the outlook for demand.
“Even by always-tough-to-predict oil market standards, it’s a highly uncertain outlook”, said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York.
If Iran sanctions bite, there’s very little spare production capacity to prevent higher prices, he said. But if the Saudis increase output just as “trade fears and emerging market weakness draw down demand, prices could collapse, as they did late 1990s when Opec hiked output just before the Asian financial crisis,” he said. “It’s a tough spot.”
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