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INTERVIEW: Vitol research chief sees OPEC+ production cuts 'working'

Highlights

Non-OPEC output surge likely to fade after 2020

Oil market aligned with economic fundamentals

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London — Production cuts by the OPEC+ group of oil-producing countries have helped balance the market and may be less needed as the surge in non-OPEC output fades and anxieties about the group losing market share recede, Vitol global head of research Giovanni Serio said in an interview.

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Speaking with S&P Global Platts, Serio, whose work informs decision making at one of the world's largest commodity traders, said he saw a fading of the oil supply glut, which had supported demand in 2015-16 and masked economic fundamentals, and a period ahead "of more challenged growth in non-OPEC" supply.

The market is now driven by fundamentals including "macro news" such as trade conflicts and economic policy decisions, he said.

"Demand is a lot more correlated with the economic cycle," Serio said. "We are going into a period where we are much more balanced. You can see -- as we have seen this year -- the economy being much more of a driver. Economic uncertainty, economic volatility, are likely to impact the demand side more."

Serio highlighted the slowdown in the US shale sector, with shale producers no longer able to access the cheap credit implied by low central bank interest rates due to a record of low returns, as well as investors' concerns about environmental, social and governance metrics.

"We're seeing what is likely to be another period of very strong growth in non-OPEC supply, but beyond 2020 there are a lot less projects expected to come on line," he said.

Serio underlined the uncertainty besetting markets, including risk of economic recession, and uncertainty over the constraints placed on Iran and Venezuela's exports by US sanctions. But he said the likely slowdown in US production means OPEC and its partners have less need to worry about their market share.

"The reduction in capital flows to shale and low investment in the oil market in general have likely reinforced OPEC's view that its strategy of rebalancing the market rather than defending market share will pay off," he said.

"From what we know right now it looks like it's working," he added, referring to the OPEC+ supply cuts.

"If you have, in the medium-to-long term, lower investment in the oil market, and you have less growth in shale ... then you have a bigger role for OPEC to play and a potential to stabilize the market share and even build market share."

ABQAIQ ATTACKS

Serio rejected the idea of a complacency on the part of the oil market suggested by the limited price reaction to September's attacks on Saudi oil facilities, including the giant Abqaiq processing plant.

The short duration of the price spike at the time reflected supply fundamentals, including the ability of US shale producers to expand activity in the case of more deep-seated shocks, and especially the vastness of the US Strategic Petroleum Reserve, currently equivalent to 600 days of net oil imports, he said.

"There is plenty of room for [US President Donald] Trump, for any president, to release the Strategic Petroleum Reserve," he said. "That was part of the muted response [to Abqaiq]. Then there is the availability of oil in the ground and that has to do with shale responding to the oil price. Few people were willing to bet on long-term increasing oil prices on the back of that."

-- Nick Coleman, nick.coleman@spglobal.com

-- Edited by James Burgess, newsdesk@spglobal.com