This order of magnitude was, as such and everything else equal, sufficient to absorb the surplus on the world market in about a year. Twelve months later, we observe that the exceptional agreement of November 2016 only resulted in a reduction in inventories of around 100 million barrels of crude oil and even lower in terms of total inventories, crude oil and refined products combined. Over the same period, the price per barrel shows a substantial rebound of around 40%. However, on the one hand, this rise was accompanied by a 15% drop in the US dollar and, on the other hand, the current price level in absolute terms, currently close to 60 US dollars, remains below the levels unofficially targeted by most major producing countries to halt their deadly economic spiral that began at the end of 2014.
The analysis could stop at the repeated observation of a poor performance of an OPEC agreement. Assuming a status quo of the interests, strengths and weaknesses of the main stakeholders, we could anticipate an extension of the 2016 agreement for a reasonable period of 6 to 9 months, allowing pragmatic management, limiting the risk of disappointing the market and feeding contrary expectations that are always difficult to reverse. But we think that this status quo assumption is no longer valid any.
In the first place, the signals sent by the Russian representatives over the last few days testify of a certain wait-and-see attitude in relation to the interest of renewing their participation in the effort to regulate production. The reason is simple: Russia’s macroeconomic performance continues to belie the consensus of the community of economists predicting its imminent collapse. The Russian economy, through the adjustment of the ruble, has on the contrary revealed an unsuspected capacity for adaptation and redeployment which de facto reduces the dependence on a rebound of the price of oil and therefore the need to contribute to the resorption of the oil surplus.
Second, the internal situation of Saudi Arabia, unlike that of Russia, continues to deteriorate on all fronts and that of the social contract, at the very origin of the constitution of this country, is not the least. The prospect of financial strangulation in the short term, by the drying up foreign reserves, has led the new Saudi strongman, Prince Salman, to lead in recent weeks an unprecedented purge in the circles of power. The seizures of assets, to the detriment of those designated as guilty of corruption, provide a financial breath by temporarily interrupting the bleeding of public finances. In the short term, the Saudi power offers itself a respite. But this should not hide that Saudi Arabia has failed in recent years in all its strategic directions: regulation of the global oil market, regional influence, transformation of the domestic economic structure. The Vision 2030 plan, in stark contrast to the flexibility the Russian economy has demonstrated since 2014, is likely to add to this list of fiascos. In addition, the ongoing destabilization in Saudi Arabia is an additional negative signal to potential investors in the Saudi Aramco IPO.
Third and finally, it should be emphasized that the only real element of status quo lies in the abnegation of investors who continue to support the shale industry in the United States, despite some defections including that of BHP, one of the key actors of this sector, which recently announced to throw in the towel and dispose of all its assets.
These three factors thus plead for an extension of the 2016 agreement to a minimum and a pause of the rebound in the oil price in real terms (taking into account the movements of the US dollar). But the essential thing lies in the fact that the status quo, the business as usual scenario has lived. For the last three years, Russia and China have emerged stronger and Saudi Arabia is falling apart. Meanwhile, the United States and the European Union are increasingly becoming spectators of an evolution of the world that is escaping them.
Olivier Rech, Head of Energy-Climate Research