LONDON (Reuters) - The world’s largest oil producers could reverse their strategy of raising output and revert to reduction mode if the price of crude holds near $70 a barrel into next year, Mercuria Chief Executive Marco Dunand said on Thursday.
The Organization of the Petroleum Exporting Countries (OPEC), together with Russia, Oman and others, embarked on a strategy in 2017 of cutting output to drain a vast overhang of global oil inventories and prop up the price.
“If we start moving into the low $70s on Brent, I think some of those producers will start asking themselves whether they haven’t overreacted to the earlier price rally and start considering balances,” Dunand told the Reuters Global Commodities Summit.
“They’ve spent the past three years bringing inventories down to more historical levels. Is there going to be enough cohesion among them to curtail production again?”
The producers’ plan worked to the extent that the price of a barrel of oil rose to a four-year peak around $85 a barrel in early October, from less than $45 in mid-2017, while global inventories fell to OPEC’s five-year target.
With the impending loss of anything up to 2 million barrels per day (bpd) of Iranian crude exports because of U.S. sanctions, OPEC, led by Saudi Arabia, has pledged to raise output to prevent the gap between supply and demand from becoming too tight. Sanctions come into force from Nov. 4.
The price has slipped to around $72 in recent weeks, thanks largely to concerns over the impact to demand growth from an escalating trade dispute between the United States and China, while inventories worldwide have begun to swell again.
Mercuria trades more than 2 million bpd of oil and, together with rivals Vitol, Trafigura and Gunvor, ships billions of tonnes of commodities between the world’s producers and consumers.
“Because of trade tensions and a number of other factors, such as a bit of exuberance on other fronts, there is plenty of risk that demand growth will not be a strong as originally anticipated,” Dunand said.
“If you put it all together, the chances are that we are going to be building (oil) inventories.”
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Reporting by Amanda Cooper; Editing by David Goodman