The Organization of Petroleum Exporting Countries, OPEC, meets in Vienna today to deliberate on its plan to extend output cut, an agreement reached in 2016. PREMIUM TIMES’ Oladeinde Olawoyin examines the issues.
As the Organization of Petroleum Exporting Countries, OPEC, and other producers meet in Vienna Thursday (today), market participants expect that the cartel will agree to extend output cuts.
There have been indications in the past weeks that the cartel would extend its 2016 deal, ostensibly ending by the end of June 2017.
Oil producers are moving closer towards agreement on extending deal to limit output, as the cartel battles excess stockpiles and a resurgent U.S. shale industry that have weighed on prices.
Reports said the deal could be run for another three to six months beyond the end of June.
A preliminary agreement to extend the deal had been reached by most, but not all, producers, reports said.
2016 OUTPUT CUT DEAL
Earlier in December 2016, the oil producers’ group had agreed on an output cut deal that started on January 1, pledging to reduce output by almost 1.8 million barrels per day (bpd) during the first half of 2017.
Nigeria, Libya and Iran were exempted from the deal, largely due to poor output occasioned by sabotage of oil facilities as well as initial sanctions on Iran by the U.S. and its allies.
The Nigerian oil-rich Niger Delta region had been rocked by agitations by militants who attacked oil installations, sabotaging efforts to raise output. The nation had since recorded increased output, following series of negotiations between government and community leaders in the restive region.
Analysts said consensus was building before OPEC’s Vienna meeting on Thursday, for extending cuts by nine months, not just six.
PREMIUM TIMES gathered that an OPEC panel met last week to discuss the conditionalities, raisinghopes of a nine-month extension deal.
“All options are open,” Reuters quotes an OPEC source as saying during the meeting, adding that a deeper cut in output was an option depending on estimated growth in supply from non-OPEC producers, mainly U.S. shale oil firms, among other scenarios.
The oil producers also aim to facilitate a deeper cut in output, OPEC sources told Reuters last Friday.
Already, Saudi Arabia and Russia, a non-OPEC state – both world’s top two oil producers – have agreed on the need to prolong the current cuts until March 2018.
But Saudi Energy Minister, Khalid al-Falih, had said that extended curbs would be on the same terms.
A meeting of the OPEC Economic Commission Board, which does not set policy, preceded Thursday’s gathering of OPEC and non-OPEC oil ministers who are to decide whether to extend the oil output deal beyond June 30.
Oil prices have gained support from reduced output but high inventories and rising supply from producers not participating in the accord –particularly U.S. – have limited the rally, pressing the case for extending the curbs.
CONCERNS OVER NEW DEAL
But as the cartel meets Thursday, analysts said the market needs more than an extension, raising concerns over compliance among member states and uncertainties in prices.
“Despite a supply cut extension being factored-in by the market, oil prices have made only modest progress,” says BNP Paribas, an international banking group with presence in 75 countries.
“It may take more than an extension to rekindle bullish spirit,” it added.
“Perhaps more so than in the recent past, the oil market is data dependent, waiting on the tangible signs of declines in visible oil stocks and exports before buying into OPEC pledges.
“In turn, OPEC will need to maintain strong compliance to prove effectual in reducing the global oil inventories,” the bank was quoted as saying by Reuters.
It stated further that, “Should production cuts be enforced by the rest of the OPEC members, it highlights the fact that oil production from OPEC, including Russia, which accounts for roughly 45 percent of global oil production, are in reverse gears.
“With higher prices seen in May, it does suggest that the decision for a production cut extension to end-2017 has been priced-in.
“Even if oil prices rally after the OPEC meeting (especially if the cartel announces deeper production cuts and/or extending its production period beyond 2017), the rally may be effectively capped around its $55-$60/bbl especially when U.S. oil production comes raging back.”
According to Merril Lynch of the Bank of America, “If OPEC cuts production even more, it will likely lose additional market share to U.S. shale and prices may not move up much more.
“Conversely, if OPEC hikes output, oil prices could collapse to $35/bbl, setting the cartel on an even more difficult fiscal path.
“In our view, most OPEC members cannot afford either scenario at this point … we believe that OPEC will stay the course, keeping production on hold over 6 to 9 months and hoping that demand improves.”
On its part, Goldman Sachs opined that a nine-month extension would normalize inventories by early 2018.
“But we see risks for a renewed surplus later next year if OPEC and Russia’s production rises to their expanding capacity and shale grows at an unbridled rate,” it said.
NIGERIA NEEDS EXTENSION
Nigeria, Africa’s largest economy, relies on oil proceeds as its main revenue source.
The nation’s long-term reliance on oil has caused economic pain in recent years as internal problems meant the country was unable to match its historic production levels.
This proved to be a key factor in the West African country securing exemption from OPEC’s landmark 2016 deal to curb a global supply overhang.
The nation looks forward to an extension of the output cut by members of the oil producers’ group, Ibe Kachikwu, the minister of petroleum, had said in early May.
“The indications that I have so far is that there is a willingness to extending that,” Mr. Kachikwu said.
“I expect we (Nigeria) will get OPEC exemption but one year from now will it be renewed? I am not too sure.
“Over and above extending, we need to continue to engage; we need to find a way to stabilise international oil price, otherwise everybody will lose out,” the minister added.
Similarly, Nigeria’s Minister of Finance, Kemi Adeosun, said, the deal gave the nation an opportunity to plan.
“We very much are benefitting from the improved oil price, you know it went as low as $28 a barrel. So the region that it is in at the moment, it gives us the ability to plan,” she said in an interview with CNBC.
“What we didn’t need was volatility, we need much more stability which the OPEC deal has given us,” the minister said.
When asked how critical it would be for the oil producing cartel to extend an output reduction deal beyond June, the minister said the “general consensus” among oil producers was stability around the $60 a barrel mark would be a necessary milestone.
“I’m confident that all the players involved know that we need stability,” Mrs. Adeosun noted.