In Oil & Companies News 03/10/2016
The unexpected happened and Opec ministers came to a tentative agreement to control their production to try and stabilise the oil markets and, perhaps, improve prices after more than two painful years for oil producers worldwide.
The informal consultations in Algiers on the sides of the International Energy Foundation meeting were turned into an extraordinary conference of Opec ministers to give the decision strong official backing.
The most important part of the official statement said: “The Conference opted for an Opec-14 production target ranging between 32.5 and 33.0 mb/d, in order to accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward.”
Opec crude oil production in August was 33.237 million barrels a day (mbd) according to it, and 33.47 mbd according to the International Energy Agency (IEA). Therefore, even if we consider the lower end of the target and assume that Opec production does not increase further from now until November, then we are talking about a nominal reduction in production of about 0.7- to 0.9 mbd.
Given this modest cut, I wonder why Opec members couldn’t reach such a decision much earlier and why they couldn’t reach a compromise to freeze oil production in April. But this is not to belittle this decision, which was agreed unanimously by all members and the first time since 2008 that it agreed to reduce production in response to weak market conditions and prices.
In its September Monthly Oil Market Report, its secretariat said that demand for Opec crude oil in 2017 is forecast at 32.5 mbd. Perhaps, some members thought it could be higher at 33 mbd and that may explain the range of desired production mentioned in the press release. It gives member countries room to rethink the position come November when the annual Opec conference will be held.
Reconsider
The market as usual reacted sharply to the decision in a sort of knee-jerk reaction, and crude prices soared by $2.72 and $2.38 a barrel for Brent and WTI marker crudes respectively to close at $49.24 and $47.78 (Dh180.71 and Dh175.35) for the two markers at the close of the week. But this is not the end of the story as the markets may reconsider. Perhaps, it will be a few more days before a direction is formed.
Of course the devil lies in the details. We have to wait and see how the new production “ceiling” will be divided among members in November as a result of the committee of high-level representatives that will meet with the secretariat “to study and recommend the implementation of the production level of the member countries”. Not an easy task considering historical experiences where supposedly technical representatives act politically and sometimes even more than the ministers.
It is not clear whether Opec has abandoned the idea of conditionality to seek participation of non-Opec producers as the press statement said the committee will “develop a framework of high-level consultations between Opec and non-Opec oil-producing countries” and “to be considered at the November Opec Conference”. The unanimous Opec decision may encourage at least Russia to chip in its support.
The anticipated cut in production is less than 1 per cent of world oil demand and therefore fundamentally it is hard to see how this will reduce the glut and the high stock levels in consuming countries. that weigh heavily on oil prices. The New York Times said “While the Opec agreement may strengthen oil prices in the short term, it probably will have little long-term effect”.
Risk
This reflects the fear that Opec members may not strictly adhere to the agreement as happened many times in the past.
There is the risk that Opec production may increase sharply come November, which will make a final agreement more difficult. Before the decision Iran was insisting on reaching a production of 4 mbd before it would agree to a freeze or cut.
Now that its production has been stagnant over the last four months at around 3.6 mbd, perhaps reality is sinking in. Nigeria and Libya may increase production if security and political conditions improve. It is also not clear how Iraq would control production given that its agreements with the international oil companies call for increased investment and, consequently, production.
By this agreement, there is no way that prices are going to rise to pre-June 2014 level and it is not in the interest of Opec to allow such a runaway market which will bring more unconventional supplies and repeat the boom-and-bust cycle.
Therefore, the next few weeks before the November conference are going to be interesting times. The Opec decision if implemented in good faith will at least prevent prices from falling again and may even bring support from some non-Opec producers.
Source: Gulfnews
