OPEC extension falls apart at the seams?

By Sonny Atumah

The Organisation of the Petroleum Exporting Countries, OPEC ministers gear up for the half year meeting on May 25, 2017, at the Vienna, Austria headquarters to review the performance of oil production cuts in 2016. The oil lid policy by the 13-member OPEC and supported by 11 non-OPEC allies appears to have counterbalanced supply and demand volatiles since July 2014.

A precipitous price fall of crude oil led to high global inventories which indeed led to lower revenues and budget deficits of many OPEC members including Saudi Arabia. The tussle for market share had ding-donged between Saudi Arabia led OPEC and other producing nations led by the United States using shale oil. OPEC and major oil exporting nations including Russia cut output by 1.8 million barrels per day, mbpd to shore up prices.

OPEC that promotes market share kept it in abeyance and supplemented it with a new market management policy. It is not surprising that Saudi Arabia leading the pack last December preferred higher and stable oil prices to its traditional hold on market share. Saudi Arabia production cut was 486,000 bpd out of the 1.2 mbpd taken out from the market by OPEC. After the cut of a production level of 31.95 mbpd was achieved by February. Russia cut output by 300,000 out of the non-OPEC producers share of 558,000 bpd agreed for the January to June 2017 oil output cut.

Iran was given the all clear to increase production to pre-nuclear sanctions levels which now stands at 3.8 mbpd. Will Nigeria that was exempted from the oil freeze to recover lost ground from militant activities in the Niger Delta continue to enjoy that privileged status? Did Saudi Arabia contemplate its internecine regional rival Iran being the beneficiary of the current oil cut deal? With oil revenues dwindling and considerable market share loss it is a mixed bag for the Saudis even as they push for oil freeze extension.

Saudi Oil Minister, Khalid al-Falih believes a consensus on extension was an accepted deal by OPEC. Although his Iranian counterpart, Bijan Zanganeh concurred, Iran says it would support the extension if all, or the majority, of the group did the same. It is however not clear whether Russia would endorse the output cut extension but Energy Minister, Alexander Novak said his country fulfilled its side of the deal. Oil experts believe an extension is necessary and near certain beyond the realm of speculation. The thought is that the benefit of output cut extension is a stable market.

A group believes that the Saudis are trying to have their cake and eat it. Reason is that the Saudis are advocating output cut extension and trying to offer European buyers tempting prices that would make it easy for traders to hedge or protected. Saudi Arabia is alleged to have lowered its June selling price of Arab Light billed for Asian markets. Saudi Arabia has explained that its raised production from 9.74 to 10.01 mbpd in January was for stockpile.

Facts Global Energy, FGE Consultants chairman, Dr. Fereidun Fesharaki last Monday at the 25th Middle East Petroleum and Gas Conference in Dubai, UAE was sure OPEC would not jettison the policy. He was of the view that OPEC which has been monitoring world crude inventories may have perfected response to a counter. To the former advicer to the Iranian Prime Minister in the late 1970’s the reaction of global crude inventories to the output cuts will determine how long OPEC and allied producers stick with their policy of pumping less oil to counter a global glut. He was of the view that oil may drop to as low as US$40 a barrel if the United States stockpiles increase. A surge in world crude oil underscores the FGE head calling for OPEC cutback extension to the end of 2018.

The U.S. Energy Information Administration revealed that domestic crude supplies fell for a fourth consecutive week by 900,000 for the week ending April 28 through inventories still strong despite OPEC crude oil exports dropping on the aggregate in April. Government released 1.5 million barrels from the strategic petroleum reserve, SPR for the week. The reality is that the Permian shale oil producers are striving to get there. The United States rig counts number 870 as against 420 for the same period last year.

The prediction that capital expenditure invested in the last few years would bring crude oil oversupply in the 2018-2019 operational years may not be an exaggeration. But American shale producers thought of getting borrowing bases from the credit lines of lenders had such facilities suspended when shale profitability was in doubt. Borrowing bases are amounts oil companies can draw from revolving credit lines from which they can borrow, pay back and borrow again. The facilities cut by banks when oil prices never showed signs of rebounding in 2016 are now being considered.

The rumour mill as invisible hand plays significant role in determining market price of crude. Even with direct supply intervention, investors relish in speculation of imminent oil glut to destabilise prices. Speculations were rife that with shale technology oil prices would be US$20 per barrel to make mincemeat of OPEC’s production cap. Known investment gurus tread within the realm of speculation to strike deals and make money. Though OPEC may have given a signal, it should be genuine and thorough in considering output cut extension to avoid losing market share and price stability.

 

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