OPEC deal could be in jeopardy before November meeting

Sunday 06/11/2016
The OPEC headquarters in Vienna, Austria. (Reuters)

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.