What would a global recession mean for OPEC?

The Roman diviners looked for omens in the flight of eagles or in the bowels of sacrificed animals, before deciding to wage a battle. The inversion of the bond yield curve on Wednesday, often heralding a recession, is clearly not a good omen for the oil market. But should oil exporters step up their campaign to protect prices or retreat?

The inversion of the yield curve, where short-term bond yields are higher than long-term yields, has predicted recessions in the United States since 1956, but the recessions themselves have followed between three and eleven months later. Some analysts downplay this warning because of special circumstances – central bank rate cuts around the world, secular decline in inflation and population growth – but there are still special circumstances.

The indicator does not come from nowhere. Consumer spending, employment and wages seem solid, but manufacturing and trade are disastrous. The trade war between China and the United States continues to weigh heavily on Germany and Japan, as well as the eventuality of a disorderly Brexit in October. Of the two drivers of global oil demand in emerging economies, China and India have seen a decline in new car sales.

The International Energy Agency further reduced its estimates of oil demand for this year and the following year and noted that only China had experienced significant expansion in the first half of the year. this year. It is forecasting growth of 1.3 million barrels per day (bpd) next year, but this growth will be overwhelmed by a supply growth of 2.2 million bpd outside of the market. 39; OPEC. For once, this is not entirely dependent on the American shale: the giant Norwegian oil field Johan Sverdrup is due to start in November, Brazil to reach a record production and Guyana to reach its first oil yield at the beginning of next year.

After peaking at $ 74.57 a barrel on April 24, Brent crude prices have consistently retreated beneath these clouds, despite geopolitical concerns over Iran, reaching $ 59 on Friday.

For the current oil market, a recession, or even a significant economic slowdown, would be different from recent memory. The 2008 financial crisis followed the surge in oil prices, mainly due to Chinese demand. The declines in 2001, 1990-91, 1981-82 and 1973-75 were the result of soaring prices (albeit a very slight one in 2001) caused by political upheaval in the Middle East and / or production restrictions. of OPEC. In almost all cases, Opec then reduced its production to increase prices in the face of weak demand.

History has shown that interventions in response to structural change are largely ineffective.

Khalid Al Falih, Saudi Minister of Energy, Industry and Minerals

This time, the fall in prices and the reduction in production have already occurred – prices fell at the end of 2014 due to overabundance of US shale oil and Opec, as well as Russia and other non-Opec allies, whose production was reduced from early 2017, when the global economy was booming. This gives them less leeway if the demand weakens.

This puts them in a delicate position. Riyadh shifted its exports from the US, which enjoyed extensive surveillance, to more opaque China, and approached other OPEC members to consider action against falling prices.

Khalid Al Falih, Saudi Minister of Energy, Industry and Minerals, told the Ceraweek conference in 2017 that "history has shown that intervention in response to structural change is largely ineffective "But that it would support" Opec's intervention to lighten … short-term aberrations such as financial crises, economic recessions ".

Iran and Venezuela will not save the exporters' organization this time – for the simple reason that their production will not be able to fall further before exports dry up completely. Libya remains volatile, but production has fluctuated in the range of 300,000 b / d in the past year.

Saudi production was about 9.65 million bpd in July, below the agreed limit of 10.31 million bpd. However, due to overproduction in Iraq and Nigeria, OPEC's total output, excluding the three exempt members, was barely below target. Iraqi production in particular is expected to continue to increase as new export infrastructure comes into play. If this situation continues, OPEC figures indicate that production will be 600,000 barrels per day above average. the demand for its gross next year.

MEPs could hope that American shale will fall sharply with the end of funding. Yet, the growing dominance of big companies like ExxonMobil and Chevron, the robustness of production after the 2014 stock market crash and the opening of new pipelines that improve wellhead prices for Permian pond producers argue against them .

The signs for the gas market are even more disturbing. Liquefied Natural Gas (LNG) prices had reached $ 10.2 per million British Thermal Units (MMBtu) in December 2017, while China was increasing the use of gas to clean up its dirty skies. Today, localized LNG is selling in Asia for about 4.70 to 4.90 million BTUs, despite a Japanese heat wave. New export plants in the United States, Texas and Georgia will exacerbate the overabundance.

With regard to LNG, there is no effective organization of OPEC to impose a floor on prices. Gas exporters should ultimately benefit from low prices, in terms of market expansion, as they progress in the fight against coal. However, an economic slowdown could bring prices down for now, as the demand for electricity and the sector collapses and too committed buyers try to sell their goods.

Even in the absence of a total recession in the United States or the world, a slowdown would be bad enough. OPEC can hardly reduce further, without weighing down Saudi Arabia's wishes. Unless the discipline breaks down, the organization will also not lead to a fall in production, which would reproduce its error after the famous meeting in Jakarta in 1997. However unfavorable economic omens, producers of oil have little choice but to keep their position.

Robin M. Mills is the CEO of Qamar Energy and the author of the Myth of the Oil Crisis