OPEC to cut production, aims to stabilise markets

Sunday 09/10/2016
The OPEC and Algeria flags ahead of the informal meeting between members of the Organisation of the Petroleum Exporting Countries (OPEC) in Algiers, on September 28th.

Beirut - Oil ministers from Organi­sation of the Petroleum Exporting Countries (OPEC) members decid­ed in an extraordinary meeting in Algiers to cut the group’s production to 32.5 million-33 mil­lion barrels per day (bpd), compared to the August level of 33.24 million bpd to speed the rebalancing of oil supply and demand in global mar­kets.
OPEC, however, postponed set­ting the specifics of how much each country was expected to reduce pro­duction and which countries would be exempt from the cuts until its No­vember 30th ministerial meeting in Vienna. A high-level committee was established to recommend specific steps.
Non-OPEC producers, mainly Russia, were also asked to cut pro­duction.
The decision to cut production is a policy reversal for OPEC, which has been increasing production during the past two years to defend mem­ber countries’ market share.
The decision reflects the fears of producers of the negative effects that low oil prices have had on their economies. The decision indicates worries about hefty cuts in the up­stream budgets of major interna­tional oil companies.
There is serious concern in the oil industry that freezing and delays of upstream investments will result in unbalanced markets before the end of this decade. It is feared that there will not be sufficient oil sup­plies available to meet incremental demand by 2020.
The main reason behind the oil price drop is excess supply in the market. This phenomenon surfaced with the fast and high production of US shale oil in 2014. US oil pro­duction peaked in early 2015 at ap­proximately 4.9 million bpd, around 50% of US production at the time. Russian production also started ris­ing, recording around 11.1 million bpd, the highest level since the col­lapse of the Soviet Union in the early 1990s and the highest production level globally.
OPEC’s Algiers decision reflects deep differences among the organi­sation’s members. OPEC adopted a general policy to cut production. Will the cut be pro-rata or will the percentage cuts be different for each country? What is the produc­tion base to cut from? How can the organisation ensure transparency? Which countries will be exempted? Nigeria, Libya and Iran are expected to be exempted.
Nigeria and Libya are undergoing political turmoil and militias attacks against their oil facilities. In Libya, the Islamic State (ISIS) is leading the attacks. In Nigeria local militias in the Niger delta are destroying oil facilities.
Nigeria has a production capacity of 2.4 million bpd. Its average pro­duction in the past few months has averaged about 1.4 million-1.6 mil­lion bpd. Libya’s production capaci­ty is around 1.4 million bpd. Average production since the 2011 overthrow of despot Muammar Qaddafi has averaged around 200,000-300,000 bpd.
The main obstacle to a unanimous decision in OPEC has been Iran. Teh­ran demanded in OPEC’s meeting last April not to be included in any production decision until it reaches its pre-sanctions level of 4 million bpd. Iran has recently escalated its demand, raising production levels to slightly more than 4 million bpd. It also wants 12.7% of gross OPEC production.
Iran has been producing 3.6 million bpd during the last three months. Tehran projects increased production in 2017-18 of around 600,000 bpd from the West Karun oil fields.
OPEC members, including Saudi Arabia, who had objected to Iran’s exemption earlier, agreed to the Ira­nian demands, as it has been dem­onstrated that Iran is not ready to increase capacity soon.
Market observers have projected oil prices to increase around $5-$10 per barrel — rising from the current Brent range of $45-$50 per barrel to $50-$55 per barrel if OPEC agrees to cut production.
Iran is asking for an exemption because it asserts that other states raised capacity when Iran was un­der international sanctions. Oil countries have long-term plans for exploration and development. In fact, Iran is undertaking efforts to increase capacity while Libya and Nigeria are in turmoil. Geopolitical disputes also add to differences and complicate matters.
These questions raise doubts as to whether OPEC can reach a unani­mous decision at the end of No­vember. Russia has informed major OPEC members that it will not cut production unless the organisation has a unified policy.
Budget constraints in most of OPEC’s members have reached critical levels. The failure to reach a decision in November will see a new and larger supply glut in the markets. A third year of budget cuts can cause much domestic problems in several countries. These two fac­tors could persuade OPEC members to downplay their many differences and reach an agreement.