Despite the agreement in Algiers to cut output, the global crude balance sheet is still not healthy. There seems many a slip, between the proverbial cup and the lip.
Questions continue to circulate about Opec’s agility and indeed ability to bring about a revolution in the global crude balance.
The skepticism is not without reason. Despite the pronouncements of an output cut, the Organisation of Petroleum Exporting Countries (Opec) is continuing to produce at levels higher than before. As per the Opec September oil report, its output during the month rose by 220,000 barrels a day to 33.39 million barrel per day. The September output figure is the highest since at least 2008, Reuters said.
The International Energy Agency (IEA) is also reporting that Opec output reached a new record of 33.64m bpd last month.
On a global scale, crude output went up by 600,000 bpd in September, with non-Opec supply rising by half a million bpd – thanks to output increases in Russia and Kazakhstan. Global production in September reached 97.2m bpd, a 200,000-bpd increase on September 2015.
Dissent within Opec is also getting to surface. Opec based its output numbers on independent sources including oil traders, industry analysts and ship trackers. But some members are contesting the report. As per the Opec report, Iraq pumped 4.46m bpd in September, whereas, Iraq is insisting it pumped 4.78m bpd. Iraq is upset at it.
Saudi Arabia is also contesting its output figure of 10.49m bpd, as given in the monthly report. Riyadh is insisting it produced 10.65m bpd in September. Venezuela also said its production was higher than Opec’s given number, while Nigeria said its production was lower. Disagreement about the actual output could create additional problems for Opec. Current output is to be used as a reference point calculating the cut to be made by each country. This figure is thus crucial in this entire mathematics.
In the meantime, non-Opec production is also going up, making the market balancing act still more difficult.
As per Opec, the non-Opec output next year will grow by 240,000 bpd over this year to average 56.54m bpd, largely because of new Russian projects. In September, Russia pumped at the post-Soviet record high of 11.1m 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. 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.”
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 built in recent years, the IEA reminded.
Meanwhile, markets also reacted negatively to 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.
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 IEA is emitting negative 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 1.2m bpd in 2017, largely unchanged from 2016 but indeed down from 2015’s five-year high of 1.79m bpd.
Opec has an ominous task in hand. Even if it reaches an agreement, would its members stick to that and would that be enough, remain big questions? Oil producers, both within and outside the Opec, need to answer this riddle and for their own reasons.