Will they or won’t they? OPEC flirts with 2018 output cut extension
(FinancialPress)—Representatives from the OPEC/non-OPEC coalition are mulling over potential options regarding an extension to their current crude oil output reduction deal, as per Iraqi oil minister Jabbar al-Luaibi at a conference earlier today.
On the table are a variety of options, including a plan that would cut an additional 1% from crude oil supplies, and would also extend the cut’s original deadline of March 2018, through to the end of next year.
Though no firm decisions have been made among the group, al-Luaibi opined that he didn’t personally see a need for further cuts, and believed any talk prior to the March expiry was “premature,” however he would support any consensus that OPEC arrives at.
“All in all, the outlook seems to be bright and prices are rising,” said al-Luaibi during the Gulf Intelligence Energy Markets Forum, hosted in Fujairah, United Arab Emirates.
Back in New York, the New York Mercantile Exchange struggled to indicate where WTI crude prices were heading. Prices dipped slightly to $49.88/barrel, after touching a high of $50.42. The prior trading day say oil prices barely budging, before landing on the highest settlement since the end of July, according to FactSet data. The October contract is set to expire at the end of tomorrow’s session.
November’s Brent crude prices also dipped slightly, shedding $0.15 to land at $55.33 on the ICE Futures Europe exchange.
The question of where things are heading lands back at OPEC’s feet, as output cutbacks require a certain level of compliance to be effective.
The current agreement, which launched on January 1 of this year, involves not only OPEC, but an additional 10 non-OPEC producers (led by Russia). The objective was to cut a combined 1.8 million barrels per day in output, running through to March of 2018, in order to rebalance the market, and rely more on draws on currently stored oil.
“Things are going OK. Compliance is about 80% in some case, mabe 73% in other cases,” added al-Luaibi. “This is expected. We sense the improvement in the market. It is better than last year.””
However, other experts are slightly less optimistic about compliance.
According to Mihir Kapadia, CEO and founder of Sun Global Investors raised doubts in a note, expressing concern over Saudi Arabia’s role as de facto leader of OPEC.
“(Saudi Arabia) is leading the cartel’s production cutback, the efforts to drain the glut has (sic) been rather difficult owing to a few over-steppers from within OPEC, along with rising U.S. output,” said Kapadia.
Kapadia pointed to data from the U.S. Energy Information Administration that was released yesterday, showing expectations for a 10th straight month of rising domestic shale-oil production—with October rising by 79,000 barrels per day.
“This is one of the prime reasons the commodity continues to be stuck between [the] $52-$55 mark,” added Kapadia.
The OPEC/non-OPEC cutback deal has already seen one extension so far, with the extension to March occurring back in May. However, U.S. production boosts, along with a lack of overall compliance by some of the deal’s signatories have reduced the deal’s effectiveness.
The Joint Ministerial Monitoring Committee that is overseeing the deal is expected to meet Friday in Vienna to assess compliance and review market conditions, including those from hurricanes Harvey and Irma.
The committee consists of ministers from Algeria, Oman, Kuwait, Russia, and Venezuela. Representatives from Libya and Nigeria will also be present to provide their production outlooks, despite being given an exemption from the deal so that each nation can effectively recover from civil unrest.
The Friday summit is not expected to result in any formative decisions regarding the cut, as OPEC sources have implied any changes to the agreement will have to wait until the bloc’s next fully attended summit scheduled for November 30.
Questions surrounding al-Luabi’s country of Iraq and its own compliance remain. While Iraw saw its crude production drop by 10,000 barrels per day in August, a recent report from the International Energy Agency did not give Iraq a vote of confidence.
According to the IEA report, Iraq was given a comparatively low compliance rating of 39%.
“News that Iraq is giving positive signals about supporting deepening cuts” is part of why oil prices are seeing a recent boost, said ETF Securities commodities director Nitesh Shah. “[However Iraq] hasn’t complied with its portion of the quota since this started so [prices] could come off very quickly,” he warned.
Al-Luabi denies Iraq’s allegations of non-compliance, claiming it was fully compliant and had in fact surpassed its share of reductions. He pointed to Iraq’s current output at 4.325 million barrels per day, compared to its previous 4.565 million barrels per day output prior to the cut’s launch in January.
As the second largest OPEC producer, Iraq’s quota was to remain under 4.351 million barrels per day, as per the terms of the deal. However, OPEC’s secondary sources indicated that Iraq’s production was in fact much higher.
“There are some secondary sources that point at Iraq, but this is completely wrong and not accepted. We have strict instructions from our prime minister, in the interests of our country and the market,” defended al-Luaibi.
“We need the revenue [to fight ISIS militants] but that does not mean that we will cheat [on our cutback quota].”
Taken as an average, OPEC’s sources flagged Iraq’s actual output at 4.45 million barrels per day—according to the cartel’s latest Monthly Oil Market Report.
Al-Luaibi remained firm that his country has complied, stating: “We have exceeded our [cut in output] share of 210,000 barrels per day. We have cut around 260,000 barrels per day, if we include the KRG [Kurdistan Regional Government].”
According to the latest Platts OPEC survey, which is one of six secondary sources used by OPEC to monitor production, the cartel’s total crude oil output fell in August for the first time in five months, down 170,000 barrels per day from June, to 32.65 million barrels per day.