THE Organisation of Petroleum Exporting Countries and its allies often termed as the Opec+, are scheduled to meet next month to decide on their next steps on the global energy chessboard.

The overall scenario continues to be difficult. Notwithstanding the Opec+ output cut regimen, an oil glut is looming, underlines the Paris based International Energy Agency (IEA). “Unless there is very strong demand growth recovery, we will see a surplus,” Keisuke Sadamori, the IEA’s Director for Energy Markets and Security told CNBC in Singapore last Tuesday.

“Overall, we will continue to see a well-supplied market in 2020,” Sadamori said, echoing the IEA’s monthly oil report from earlier in October, which painted a rather gloomy picture of oil demand growth in the short term.

In a report earlier this month, the IEA cut its demand growth forecast by 100,000 barrels per day (bpd) for both 2019 and 2020, to 1 million barrel per day and 1.2m bpd, respectively.

Markets thus continue to be faced with considerable headwinds. To the detriment of the producers, crude prices continue to be under pressure. Last week was no exception. Weakening Chinese industrial output data and inventory gain in the US once again pointed to a mellowing, global crude demand.

Industrial output in China shrank for a sixth straight month in October while growth in the country’s service sector activity was also at its lowest since February 2016, Reuters reported.

A protracted trade war between China and the United States has also been weighing on the crude outlook. Markets took a hit on reports from Chile, that due to the ongoing demonstrations in the country, the US and the Chinese leaders would not be able to meet and discuss ways to get out of the ongoing trade war.

In the meantime, a rise in the US crude inventories also dented the overall market psyche. As per the US Energy Information Agency (EIA), in the week to October 25, U.S. crude inventories rose by 5.7m barrels, compared with analyst expectations for an increase of 494,000 barrels only.

Also, the rise in Opec’s October crude output, courtesy the swift Saudi output recovery from the September attacks on its oil infrastructure, also weighed in on the markets.

Markets thus slipped. Opec+ actions have till yet been unable in stemming the rot.

What could the Opec+ do in the circumstances? There is growing frustration in the market. Just rolling over the current output beyond March next, may not do the job. Opec+ will have to go beyond, most now agree.

With the Aramco IPO under the spotlight, Saudi Arabia seems determined to do whatever it takes to stabilise the markets and push the crude oil market prices up. The Kingdom has signaled that it is prepared to cut its oil production even deeper than now, Nigerian oil minister Timipre Sylva told Bloomberg TV on Tuesday, citing a recent conversation he had with Saudi Energy Minister Prince Abdulaziz bin Salman. “He assured me that they are very ready to even cut deeper,” Sylva, told Bloomberg.

As the crucial meeting of Opec and its Russia-led non-Opec partners in the deal draw closer, speculation is already rife that the allies will have little choice but to extend the cuts or go even deeper, considering the slowing oil demand growth and the persistent oversupply.

But Moscow continues to stay non-committal. Russia’s Deputy Energy Minister Pavel Sorokin said earlier last week, it was too early to talk about a potential deepening of the cuts because the production cut mechanism is not limitless.

“The Opec+ mechanism has shown that it is efficient, but it cannot be efficient forever,” Sorokin said, noting that the Opec+ coalition will monitor and take into account the slowing U.S. production growth at the December meeting.

Russia’s ‘it’s-too-early-to-say’ position led ING analyst Warren Patterson to say “it does seem it is going to be a repeat of previous meetings, where there is uncertainty about where Russia stands regarding those cuts”.

As per the ING, Opec and its allies need to take further action in December to support prices and draw down inventories, but convincing all producers to cut even more could be a challenge.

The decision is not straight forward. There are ifs and buts to it. Opec and its allies will have to counter them — yet at the cost of market share. The issue of market share may not be a red herring at the moment, but in the longer run, Opec+ cannot and should not continue to overlook it.

Published in Dawn, November 3rd, 2019