Oil Market Uncertainty Can Worsen Into A Crisis, Warns Expert

Looming risks over the oil market may result in a “crunch” crisis in the coming months, warned Bob Dudley, chief executive of British Petroleum.

The expert’s comments rebut the current perception that U.S. sanctions on Venezuela’s oil trade and Saudi Arabia led OPEC’s production cuts would weed out the excess supply this year and make the oil market stable.

Speaking at an energy sector conference in Cairo, Egypt, Dudley referred to the dark clouds over the oil market. They include the situation in Venezuela, uncertainty in Libya, rising production at the Permian Basin and the effect of U.S. sanctions on Iran.

When asked about production cuts from OPEC and its allies known as OPEC+ coalition could stabilize oil prices, Dudley replied: “Well, there's a lot of variables here and there's a lot of things that could lead to a real crunch .”

The OPEC and allies decided to cut production in December on the back of slackening demand growth and rising supply that pulled down oil price by 40 percent in the last quarter of 2018.

Market is tight

Dudley suggested a price band of $50 to $65 per barrel as fair to both producers and consumers.

“So, the OPEC+ countries agreed to reduce production in the first quarter, we don't even really have data from it. We will have to see what the data looks like but the markets feel tight to me," he commented.

Unlike Feb 11 Monday, Brent crude on Tuesday traded at $61.90 a barrel up 0.6 percent, while West Texas Intermediate (WTI) came to $52.68, some 0.5 percent higher than the previous session.

In the upcoming joint meeting of OPEC and non-OPEC producers in April, there is a possibility of new strategic decisions that may impinge on oil price and production volumes.

When asked, how that meeting will influence the energy market outlook, Dudley replied that in situations where oil prices reign too high or languish low, any kind of “unintended consequences” can follow.

Despite the optimism that self-regulation on production to balance market concerns, the flipside is that supply-side risks often evade serious attention.

Enhanced cuts can offset fragile balance

The OPEC is trying to pre-empt a free fall in oil prices as happened from 2014 to 2016. For this, it has made linkages with 10 non-member OPEC nations, including Russia, so that at least 1.2 million barrels a day can be kept out of the market.

Now the total OPEC production is barely above 30.8 million BPD in January Vs the 31.6 million bpd of December 2018, said sources.

Saudi Arabia is leading the OPEC cuts. It pumped just 10.2 million bpd in January that was less than 350,000 bpd it delivered in December.

Saudi Arabia has vowed that it would continue to cut production to a level of 9.8 million bpd in March, according to Saudi Energy Minister Khalid al-Falih who shared this information in an article published in the Financial Times. Clearly oil supply is dwindling.