UAE hesitant on need for further output cuts

UAE oil minister Suhail al-Mazrouei has played down the need for deeper production cuts by Opec and non-Opec producers as a means to prop up oil prices that have fallen by close to 20pc since April.

Speaking in the Emirati capital today, al-Mazrouei argued that deeper cuts would not necessarily prove effective in reversing a steady decline in prices over the last two quarters, as the downturn likely had less to do with market fundamentals, and more with other geopolitical issues, like the mounting trade war between the US and China.

"We do not take decisions like that based on feelings, but on data and analysis," al-Mazrouei said today. "Anything the group sees that will balance the market, we are required to discuss, and hopefully go on and and do whatever is necessary. But I would not suggest that we just jump to cuts every time we have an issue on trade tensions."

Al-Mazrouei was speaking at a press conference to mark the start of the World Energy Congress (WEC) which formally opens tomorrow. The Opec, non-Opec Joint Ministerial Monitoring Committee (JMMC), which oversees compliance with the production cuts, will meet on 12 September, on the sidelines of the WEC, with an eye to discussing plans for the fourth quarter of the year.

Opec and its non-Opec allies, known collectively as Opec+, are around one third of the way into an agreement to scale back their collective output by around 1.2mn b/d, in an effort to reduce commercial OECD stock builds and help return balance to the global oil market. The latest iteration of this agreement will expire at the end of the first quarter of 2020.

But the 24-strong producer coalition is likely to face difficult choices in the coming months on how best to respond to the lower oil prices and declining economic growth projections.

"There are concerns around trade tensions, especially between the major economies the US and China. I would argue that sometimes, even though they have nothing to do with supply and demand, those forces are affecting the price in the short term," al-Mazrouei said.

The World Bank's global growth prospects for 2019 have recently been revised down from 3pc to 2.6pc.

Major Opec and non-Opec producers would feel the economic brunt of sustained downward pressure on oil prices, which have fallen by close to 20pc over the last five months. Ice front-month Brent has been teetering at around $61/bl, down from a 2019 high of $74/bl in late April.

This could be particularly painful for Opec kingpin Saudi Arabia, which is forecast by the IMF to have a fiscal break-even price at $85/bl for 2019, and $78/bl for 2020. Officials from some key participating countries have said that they would like to see prices at around $70/bl.

"We are not concerned about what is the price [of oil]. I think the concern should be around what is the balance of inventories," al-Mazrouei said.

The Opec+ strategy to reduce crude inventories has been relatively successful, but expectation that this would bolster prices has been decoupled by the US-China trade war, leaving the group in a problematic position.

According to Argus estimates, global commercial stock cover continues to decline, starting September at 44.3 days of forward cover compared with 46.5 days at the beginning of April. By this time next year, worldwide commercial stock cover is expected to have reached a low of 42.7 days, implying a loss of 412mn bl of oil inventory since April 2019.

"Its not only the oil industry that is suffering, all markets are suffering from this trade tensions between US and China," al-Mazrouei said. "We are hopeful that there will be some good news later this year, hopefully tensions will be resolved... [but] our job is to make the market balanced and we will continue that work. If we need to take any additional actions, that is going to be discussed," al-Mazrouei said.

Aside from restraining output, it remains to be seen what other measures Opec+ could implement to protect crude oil from further price declines.