OPEC deal could be in jeopardy before November meeting
Washington - An already fragile agreement reached by members of the Organisation of the Petroleum Exporting Countries (OPEC) to reduce collective output could collapse before the group convenes a November 30th ministerial meeting to try to agree individual country reductions.
At an extraordinary gathering of the group in Algiers in September, OPEC ministers agreed in principle to collectively cut crude output by 240,000-740,000 barrels per day (bpd) — 1-2% of total production levels.
Iran, Libya and Nigeria were granted immunity from the pact, with Tehran claiming its need to restore oil production and reclaim market share after the easing of sanctions and Tripoli and Abuja arguing they need to recover crude output following repeated militant attacks on their oil infrastructure.
The latest spoiler to an OPEC production cut deal is Iraq, which is defiantly arguing that its ongoing expensive fight against the Islamic State (ISIS) warrants Baghdad’s exclusion from reductions that OPEC is negotiating to raise international oil prices. Iraq is resistant to even freezing its output at current levels.
As OPEC’s second largest producer after Saudi Arabia, Iraq’s refusal to participate in the strategy to shave collective output would likely place the brunt of the proposed cuts on the shoulders of Riyadh and other Gulf Cooperation Council (GCC) members. Saudi Arabia was not happy about making concessions to Iran to opt out of a production freeze, let alone a deal involving reductions, and it is less inclined to accept Baghdad’s rationalisation for exemption from group action.
Iraq contributed to the oil glut and resulting depressed oil prices by boosting its crude output by more than 1 million bpd since 2014. Baghdad, however, could argue that it was Saudi Arabia’s charge for OPEC producers to open the taps two years ago that caused global oil prices to tank and that Riyadh itself has reported record production levels.
There are rumours that Saudi Arabia has floated a proposal involving as much as a 4% cut in global production that would take 1 million-1.5 million bpd out of the oil markets. This, of course, would be contingent on the involvement of Russia and other independent producers as well as all OPEC members that have not been exempted.
However, nothing much materialised from an October 29th meeting in Vienna among OPEC officials and delegates from non-OPEC producers Russia, Azerbaijan, Kazakhstan, Mexico, Brazil and Oman, although they did agree to meet again ahead of OPEC’s November 30th gathering.
Earlier this year, Saudi Arabia began ramping up production by 400,000-500,000 bpd in preparation for the seasonal rise in domestic oil demand for power generation. Having hit production levels of 10.7 million bpd this summer, Riyadh could magnanimously offer a 500,000 bpd quota reduction for itself as part of a larger deal involving cuts.
By doing so, it would still be pumping at high levels without taking a real economic hit as domestic demand for oil to meet air conditioning needs declines during the winter months and Saudi Arabia would be trimming its production anyway.
While balking at participating in a unified OPEC reduction and refusing to even freeze its output, Baghdad is also disputing OPEC’s most recent official estimates of Iraq’s crude output, which the organisation bases on figures provided by secondary sources. At the October 28th meeting of OPEC delegates, meeting, meant to hash out individual member countries’ production reductions in advance of the November 30th ministerial gathering, Iraq and Iran took issue with the figures that the OPEC secretariat has tallied for their latest oil output volumes.
There is a significant discrepancy — about 320,000 bpd — between OPEC’s accounting of Iraqi crude output for September (4.455 million bpd) and Baghdad’s (4.775 million bpd). To convince OPEC that Iraq’s higher estimates are valid, Baghdad publicly released September production figures from 26 oil fields it owns as well as a total Kurdistan oil production figure for October.
Iran has questioned OPEC’s latest official estimate for its output — 3.65 million bpd — claiming that its current pumping levels are 3.8 million bpd. Iran has declared it will not consider restraining output until it reaches 4.2 million bpd, the level that corresponds to Tehran’s market share prior to sanctions.
If Iraq joins Iran, Libya and Nigeria and watches from the sidelines as the remaining ten members of OPEC attempt to hash out production cuts — with or without Russia and other independents — the question will be whether oil markets will take seriously an accord that does not involve OPEC’s second-largest producer. As it stands, Tehran, Baghdad and independent producers would be happy to have Saudi Arabia and its Gulf allies bear the brunt of restoring oil prices to higher levels.