Oil has just reached a new milestone.
Global oil demand reached 100 million bpd in August, corresponding to the volume of 50 supertankers.
Despite all efforts to move the world's energy consumption away from fossil fuels, oil consumption continues to grow, and practically all forecasts indicate this growth will continue at least until 2030.
This year, global oil demand is expected to increase by 1.4 million bpd, according to the International Energy Agency's monthly report from August. That figure is projected to grow to 1.5 million bpd next year.
The growth in demand follows in parallel with an increasingly tight supply situation.
A series of countries are currently in the process of reducing their imports of Iranian crude before US economic and political sanctions are again imposed against the Islamic Republic.
Venezuelan oil production continues to decline, and it is now reduced by 50 percent since stable levels prior to 2015.
Struggle with price increases
Oil ministers from the Organization of Petroleum Exporting Countries (OPEC) will meet in Algiers on Sunday, and oil ministers with OPEC affiliate countries are also expected to participate.
This meeting falls under the name of Joint Ministerial Monitoring Committee (JMMC) and includes oil ministers from Algeria, Kuwait, Venezuela, Russia and Oman. Not least of all due to the approaching sanctions against Iran, other countries behind the production limitation agreement wish to be present at the meeting.
Several OPEC countries, led by Saudi Arabia, have started to hike oil production, which, according to Saudi oil minister Khalid al-Falih, is happening in order to secure oil supply for the global market as soon as Iranian exports are curtailed.
Iranian oil minister Bijan Namdar Zanganeh has on several occasions insisted that the other member countries keep within the bounds of their production quotas in order to allow the global market to be affected by the consequences of US sanctions in the form of higher oil prices.
At the most recent ministerial meeting held in Vienna on June 23, OPEC countries decided to ramp up oil production by up to 1 million bpd in order to limit further price increases. However, they did not take a position on production quota changes for single member countries.
North Sea crude for November delivery currently trades for around USD 80 per barrel. Monday, one barrel of Brent sold for USD 78.75.
Sunday, al-Falih met with his Russian counterpart Alexander Novak, and the two big producers made a joint statement and "re-emphasized their joint commitment to ensuring the adequacy of oil supplies, especially considering market uncertainties on the horizon."
"They also reaffirmed their continued commitment to promptly and appropriately respond to market developments, working with their partners," the two said in the joint statement.
Three against Iran
The two countries have since May increased the oil production with 800,000 bpd, shows data from sources including the IEA.
The US also continues to hike oil production, and US Secretary of Energy Rick Perry has held individual meetings during this last week with oil minister from Russia and Saudi Arabia.
The three countries are by a wide margin the world's largest oil producers and together account for one-third of global supply.
Iranian OPEC ambassador Hossein Kazempour Ardebili has harshly criticized the fact that Russia and Saudi Arabia are holding meetings with the US secretary of energy.
"There is no doubt that all the parties are against Iran. OPEC is responsible for restoring the market balance, not imposing a boycott on one or two founding members. That Saudi Arabia and the UAE have turned OPEC a tool for the US is nothing new. Unfortunately, not much is left for OPEC credit with such measures. It is a fact that OPEC is losing its organizational character and is becoming a forum. Simply said, nobody is afraid of a toothless lion that growls from time to time, and it does not harm anyone," says Ardebili in an interview with Iranian media bureau Shana.
The Iranian government has threatened to block ship traffic through the Strait of Hormuz if one or several OPEC countries try to profit from the US sanctions, however, so far these have largely been ignored, as any step in that direction would be viewed as an act of war.
"Saudi Arabia's practice seems to be aimed at maintaining the price of North Sea crude between USD 70-80 per barrel. The lower limit in that price interval is meant to secure oil exporting countries income on a level that largely covers their state-fiscal requirements. The upper limit aims to ensure that developing countries with growing oil consumption are not hit by an oil price shock," explains Oxford Institute for Energy Studies Director Bassam Fattouh.
Pricing dependent on OPEC production
Fattouh refers to that fact that many developing countries this year have witnessed their currencies lose value relative to the US dollar, and given that practically all the world's oil trading uses the US dollar as clearing currency, the combination of increasing oil prices and a stronger dollar have been painful.
"Striking a balance between the needs of oil exporting countries and those of consumers, and for that matter within a narrow price interval, is a difficult task, because the oil market is continually exposed to shocks. Crude production cannot just be turned up from one day to the next," says Fattouh, adding:
"Oil market pricing will to a high degree be guided by how much oil OPEC countries expect will adequately supply the market over the coming months. The oil market would be wise to expect more frequent adjustments than than has been the case in the past, which, all other things equal, will make it difficult to have a more long-term investment horizon.
The oil market is already challenged by geopolitical developments, and uncertainty regarding future production just adds to that.
Since OPEC started the oil price war in 2014, the oil industry's investments have not only decreased markedly, but the average investment profile has shifted from being very long term to quite short term.
Large sums are being invested in shale oil production in the US, where usually less than one year passes between a decision being made to start exploration to the point when oil begins to flow. The average life span of shale oil fields is also relatively short. The opposite case is deepsea offshore extraction, where ten years can pass between decision and production.
Beyond covering the annual growth of 1.5 million bpd in global demand, the industry also has to find new oil deposits in order to cover the natural production decline of 4.5 million bpd, which is the case with existing oil fields.
Add to that reduced production volumes from Venezuela, Libya and Nigeria as well as the impending sanctions against Iran, which are anticipated to remove around 1 million bpd from the oil market – thus, the weekend's informal ministerial meeting in Algiers will have crucial importance for next 6-12 months' development.
English Edit: Daniel Frank Christensen
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