Oil prices could recover to $60 a barrel by the end of the year, Saudi Energy Minister Khaled Al-Falih underlined in Istanbul last week.
Bob Dudley, the chief executive officer of BP Plc, too seem to be agreeing. Talking to Bloomberg Television on the sidelines of the World Energy Council moot in Istanbul, he emphasized that following the OPEC agreement, a range of $55 to $60 a barrel was possible by year-end.
But there seems many a slip between the proverbial cup and the lip. Global crude balance sheet is still not healthy. And chances of it getting significantly better, in the short run, do not appear too bright. Questions continue to circulate about OPEC’s agility and indeed ability to bring about a revolution in the global crude balance. The question being asked all around is; would the proposed output cut make any real impact on the markets?
The question needs to be seen in its true perspective.
Despite the agreement in Algiers to cut output, OPEC member countries are continuing to produce at levels higher than before. The International Energy Agency is reporting that OPEC output reached a new record of 33.64 million bpd last month, while on the global scale too, crude output went up by 600,000 bpd in September. Non-OPEC supply too rose by half a million bpd – thanks to output increases in Russia and Kazakhstan. Total global production in September reached 97.2 million bpd, a 200,000-bpd increase in September 2015. The IEA also underlined that OPEC was the main contributor to this global output growth.
OPEC also confirms the trend. As per the OPEC September report, its output during the month rose by 220,000 barrels a day to 33.39 million bpd. Nigeria, Libya and Iran, the three countries that have been granted exemptions from the coming cuts, continue to increase their output. Their combined output went up by 209,300 bpd last month. The September output figure is the highest since at least 2008, Reuters said.
OPEC based its output numbers on independent sources including oil traders, industry analysts and ship trackers. But it is also generating discontent within the OPEC. Some members are insisting that the report is not portraying their actual output. Iraq and some others are contesting it. As per the OPEC report, Iraq pumped 4.46 million bpd in September, whereas, Iraq is insisting it pumped 4.78 million bpd.
Saudi Arabia also argued its output figure of 10.49 million bpd in September, as given in the monthly report, underlining its output averaged 10.65 million bpd for the month. Venezuela also said its production was higher than OPEC’s given number, while Nigeria said its production was lower. Iran declined to report a number altogether.
Disagreement about the actual output could create additional problems for OPEC ministers, when they sit down to allocate output cuts. Current output of each member country is to be used as a reference point to calculate the cut to be made by the respective country. This figure is thus crucial in this entire mathematics.
And with both OPEC and non- OPEC output going up, balancing the markets becomes still more difficult. And more crude could be on way too. OPEC has just raised its forecast for non-OPEC supply next year. As per OPEC, the non-OPEC output will grow by 240,000 bpd from this year to average 56.54 million bpd next year, largely because of new Russian projects. In September, Russia pumped at the post-Soviet record high of 11.1 million bpd.
And in the meantime, despite the fact that Russia has pledged, and at the highest level, to join OPEC in cutting output, yet confusion persists. Russia›s most influential oil executive, Igor Sechin, the head of Rosneft, told Reuters last week that his company will not cut or freeze oil production as part of a possible deal with OPEC. “Why should we do it?”
Sechin told Reuters in Istanbul when he was asked if the company will cap its output. Rosneft accounts for about 40 per cent of Russia›s crude oil output.
Interestingly, this was after the pronouncements on Monday by the Russian President Vladimir Putin that his country was “ready to join joint measures on reducing the production of oil.” However, on Tuesday Sechin told reporters in Istanbul, on the sidelines of the WEC meeting, that Rosneft was aiming to raise its oil production this year above the 4.1 million barrels per day it produced in 2015. Sechin also cast doubt on whether other oil exporting countries will cut their output.
Sechin has long argued that any oil price increase as a result of joint actions by OPEC and non-OPEC members would allow the United States to resume production growth from high-cost shale deposits.
“The Americans want it most ($50 per barrel) as the shale oil projects become profitable with such a price. And $60 will (only) result in more shale oil projects,” Sechin told Reuters.
Dampening the spirits further, the OPEC September report also indicates that global crude inventories too stand “near all-time highs.» IEA too is concurring. Any (output) deal would face challenges from a three billion barrel global inventory build in recent years as well as efforts by OPEC members Libya and Nigeria to increase production curtailed by conflict, the IEA reminded. High inventory also carries considerable ramifications for the global crude market balance.
Meanwhile, markets also reacted somewhat negatively to the OPEC Secretary General Mohammed Barkindo statement last week, indicating that any possible deal to freeze oil production was likely to be reviewed after six months. Markets got a jolt from this too.
And while industry guru Fatih Birol, the executive director of the International Energy Agency, was gracious enough in Istanbul, his home town, to concede that crude prices could rebalance sooner rather than later if a limit on output is achieved and proves effective, yet his agency is emitting concern signals about global demand scenario.
Record global debt levels pose a clear risk to oil demand, the International Energy Agency said on Tuesday, citing figures from the International Monetary Fund that showed the world is awash with a record $152 trillion in debt. The IEA is now forecasting that global oil demand will grow only at a rate of 1.2 million bpd in 2017, largely unchanged from 2016 but indeed down from 2015›s five-year high of 1.79 million bpd.
OPEC has an ominous task in hand. With President Putin also underlining the need to coordinate and trim crude output, one could probably bet that some sort of agreement would be made in Vienna end November. Yet, would that be enough, remains a big if.
Oil producers, both within and outside the OPEC, need to solve this riddle, and, for their own reasons!