OPEC producers still have an uphill task despite deal

GLOBAL crude markets are far from balanced. More action is required. And OPEC is aware of it, and, seem ready to go beyond – what has already been agreed upon in Algiers.

“We will evaluate the market in Vienna by the end of November and if 700,000 barrels are not enough, we will go up. Now that OPEC is unified and speaks in one voice everything is much easier and if we need to cut by 1 percent, we will cut by 1 percent,” Algerian Energy Minister Nouredine Bouterfa, the host of late September OPEC moot, was quoted as saying by Reuters.

But before Vienna, Istanbul is lot nearer. Global energy czars are assembling there today for the World Energy Council (WEC) moot, amidst a growing buzz that ministers would use the opportunity to fine tune their strategy, ahead of the end November OPEC policy meeting in Vienna.

Skepticism rules the market though. And to counter it, OPEC needs to prove it is alive to the challenges. If the output cut deal is to make any real difference, Russia needs to be incorporated as well. And signals are positive on this count. Russian Energy Minister Alexander Novak is set to meet major OPEC oil producers in Istanbul, on the sidelines of the WEC moot. RIA quoted Novak saying he would discuss OPEC’s output deal with the ministers there.

Saudi, Iranian and Iraqi energy ministers will be among key OPEC representatives to meet non-OPEC member Russia there. Other energy ministers to be present in Istanbul include those of the United Arab Emirates, Algeria, Venezuela and Qatar, which holds the OPEC presidency.

Analysts but are continuing to underline, a lot more needs to be done before the Nov. 30 OPEC Vienna outing. There is no dearth of skeptics.

Despite the broader OPEC agreement in Algeria, they continue to insist, the deal is only a tentative one, with the details of who will cut and how much still needed to be worked out at OPEC’s next formal meeting. These skeptics continue to argue that given the players involved, any agreement-in-principle still needs to be considered tenuous.

There is but some basis for this skepticism – one can’t deny. Libya, Nigeria and to a degree Iran, are still the unknowns in the entire equation. Nigeria has restored production to 1.7 million barrels per day, up 500,000 from two months ago as it negotiates with militants who have attacked oil facilities, according to Minister of State for Petroleum Resources Emmanuel Kachikwu. And although Nigerian output was at its lowest in three decades in August, it aims to reach 2 million bpd by the end of the year, Kachikwu emphasized.

Libya in the meantime, has revived its output to 500,000 barrels a day after striking a deal with armed factions controlling export terminals, and plans to reach 600,000 by the end October. As per the data compiled by Bloomberg, Libyan production slumped to an 18-month low of 260,000 bpd in August.

Nigeria and Libya thus appear pushing OPEC output toward 34 million bpd. And this meant, that OPEC needs to cut output by 1 million bpd and not 700,000 bpd as envisaged in Algiers last month

Iran, on the other hand, continues to insist, at least publicly, it needs to touch 4 million bpd mark before capping output. Currently Iranian output is believed to be around 3.6 million bpd.

And then US shale is another unknown variable in the entire crude equation. Any firming up of the markets, would help US shale output and adversely impact the market, most agree.

The immediate price gains from the Algiers deal are benefiting competitors in the US, Wood Mackenzie is reporting. “US producers can invest with more certainty going forward,” WoodMac Research Director R.T. Dukes said in a Bloomberg Television interview.

OPEC effectively threw a “lifeline” to shale producers, according to BNP Paribas SA, while Morgan Stanley said hedging may be at the highest so far this year.

And although the US output is lower than last year, drilling in the US has picked up in response to stabilizing prices. Rigs targeting crude in the US rose for a fifth week to the highest since February, Baker Hughes Inc. said September 30.

In the current scenario, Saudi Arabia is required to take the lead. Analysts feel, in order to meet the challenge, Riyadh could be required to make an output cut of somewhere between 400,000 bpd to 500,000 bpd over the next few months.

And this seems possible and logical. Riyadh will probably make that adjustment over the next few months regardless of the accord ‘as they lower output once local power demand for air-conditioning fades,’ insisted Ed Morse, head of commodities research at Citigroup.

The OPEC deal “is not really change in the Saudi oil strategy or a big compromise on the Saudis’ part,” a Saudi oil-industry official was quoted as saying by Wall Street Journal. “The kingdom would still be able to meet all of its customers’ demand comfortably at these levels and without losing market share.”

But markets continue to be gloomy. Analysts are lowering their oil price forecasts. Oil’s rally will stall at $55 a barrel as US shale drillers get back to work and a “wall of supply” from investments made over the past decade hits the market, Goldman Sachs Group Inc. said in a report last week. Global oil markets are set to remain “very oversupplied” in 2017 amid the return of disrupted output in Nigeria and Libya, resilient U. shale production and the start of major projects commissioned over the past 10 years, Goldman’s head of commodities research Jeff Currie said in a Bloomberg television interview.

Shale producers are hedging their output as soon as prices climb to a range of $50 to $55 a barrel, allowing them to continue drilling, Currie said. While investment in new oil supply has been cut, any shortage in the market is “years off,” Currie said.

A survey of 13 investment banks by The Wall Street Journal forecasted that Brent crude will average at $56 a barrel next year, down by more than a dollar from last month’s survey, while the West Texas Intermediate would average $54 a barrel next year, also down a dollar from the previous survey. Banks in the survey see oil prices staying below $50 a barrel until the end of this year and below $60 a barrel through 2017.

Strategists at Commerzbank said that the recent price gains for oil aren’t sustainable. “After all, implementing the production cut will be extremely difficult,” the bank wrote in a report.

Performing a herculean feat, OPEC definitely surmounted a major obstacle in Algiers. Yet, there is a long way to go. OPEC oil producers still have an uphill task in hand, let’s admit and concede.

Source: Saudi Gazette