OPEC cuts- questions remain

Oct 14 2016

The recent announcement that OPEC has reached a provisional agreement to cut production came as a surprise to many oil market participants, Gibson Research said in its weekly report.

It became clear that there was an intention within OPEC to limit output within a 32.5 to 33 mill barrels per day range, down some 0.5 to 1 mill barrels per day from nearly 33.5 mill barrels per day produced by the members in August.

Details still need to be ironed out with OPEC needing to agree, who and how much to cut at the time of writing.

Iran is likely to remain exempt from any deal until its production is restored to 4 mill mill barrels per day, up from about 3.6 mill barrels per day at present.

Nigeria, which has been supportive of such an arrangement is likely to be unwilling to cap production much below 2 mill barrels per day, from recent levels as low as 1.46 mill barrels per day. Equally, other OPEC producers will claim their production is in recovery mode.

For example, production in Libya is rising but well below the 1.39 mill barrels per day produced in 2011. Venezuelan production has also been in decline, meaning they may also be unwilling to adhere to any reduction in production levels, Gibson said. 

These factors mean the emphasis is likely to be placed again on Middle East producers, with Saudi Arabia in particular focus. Saudi crude production hit 10.6 mill barrels per day in August, following seasonal trends, which typically see production increase over the summer months to meet domestic energy demand.

It could therefore be argued that production was always going to fall towards the end of the year, as peak electricity demand faded closer to the cooler winter months. Thus a cut of 0.4 mill barrels per day, which had been muted by some analysts, may have a limited impact. Other Gulf states including Kuwait, the UAE and Qatar also boosted production over the summer and may follow similar seasonal patterns.

Even if some OPEC member’s trim production, rising production from both within and beyond OPEC could offset any declines. Increases from Iran and Nigeria seem likely, whilst any artificial support to the oil price will stimulate non OPEC supply and could be the catalyst needed to reinvigorate the US shale industry, Gibson said.

Shale producers have been forced into becoming far more efficient in order to survive lower prices, meaning breakevens across the industry have fallen. Some 109 rigs have been added since May, and production may be starting to stabilise. If oil prices are to firm further, then US drilling activity is likely to intensify.

In addition, production is rising in Brazil, whilst crude flows from the Kashagan field are starting to materialise. Russia is currently sending out mixed signals. Russian production is at or near record levels, and whilst Russia has signalled it may be willing to freeze output, a cut could be a step to far for now.

Overall, whilst such action from OPEC is typically negative for the tanker market, it may not be a disaster with the impact being marginal, offset by rising supplies elsewhere. Equally, much of the cutbacks could be a reflection of lower seasonal domestic demand amongst crude producers, and thus have a limited impact on seaborne exports, Gibson concluded.

Later - a series of meetings between Russia & Saudi Arabia produced statements signalling that a potential agreement to limit crude output is a possibility.

According to President Vladimir Putin “Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join.”

At the same time, Algeria has also called for similar measures to be taken by non-OPEC members, shipbroker Intermodal reported.  

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