•Cartel predicts supply glut shrinking
Politics of oil production cut, market oversupply
At their 169th meet in Vienna, Australia on June, members of the Organisation of Petroleum Exporting Countries (OPEC) resolved to keep their production quotas for fear of creating more space for non-members in the global oil market. Assistant Editor EMEKA UGWUANYI writes on the politics of oil production ceiling.
For a few years running, the Organisation of Petroleum Exporting Countries (OPEC) has refused to cut down production even in the face of plummeting oil prices and a glut in global supplies.
Despite the negative impact on some member countries, the cartel stood firm on not cutting production to halt continued slide in prices, which fell to 12-year low early in the year.
OPEC supplies one-third of global oil, and currently still has a collective output of about 31.5 million barrels per day despite crude oil prices rallying from below $30 per barrel and hovering around $40 per barrel now.
OPEC member countries including Nigeria and Venezuela, among others, had been pushing for production increase since 2014 without success. Venezuela reportedly has been the hardest hit. With 95 per cent of its income from oil, Venezuela is witnessing its worst recession since the 1940s, and the economy is expected to shrink by 10 per cent this year. Nigeria also is funding its 2016 Budget with non-oil revenues.
Gains, losses of not
cutting production
Saudi Arabia is the world’s largest oil producer, supplying over 11 million barrels daily. It is the backbone and lead game changer of OPEC. Over the years, Saudi Arabia has been in the forefront of ensuring global oil market stability. Whenever there was market oversupply or undersupply, leading to low or high price, Saudi Arabia had always wielded its power to either cut, or increase supply to stabilise the market.
But in the past few years, Saudi Arabia and OPEC by extension, has refused cut output as witnessed in the June 2 meeting. The implication is that it will be difficult to predict the direction of the oil market, which consequently will keep prices low.
The primary reason for Saudi Arabia/OPEC not acceding to production cut is hinged on the fear of losing market share to the United States (U.S.). With the discovery and production of shale oil and gas, the U.S. became a big a producer and exporter of oil. But for the fact that the cost of production per barrel of shale oil and gas is 100 per cent higher than the production per barrel of conventional oil and gas.
Besides making the U.S. oil and gas price uncompetitive and unattractive in the global market, OPEC has to keep production quota or even raise it as it remains the only way to guarantee its market share and discourage the U.S. launching into commercial production.
At least, with low oil price, the U.S. will be able to meet its domestic fuel demand and rely less on imports but certainly will not like to sell its oil and gas far below production cost.
Also the political conflict between Iran and Saudi Arabia over their differing positions on the Syrian issue, added to the inability of the cartel to reach a consensus on output cut. The Islamic Republic of Iran has the world’s fourth-largest crude oil reserves and the second-largest reserves of natural gas. It was pumping about 4.5 million barrels of oil per day before international sanctions brought that down its output to 2.8 million barrels.
What obtained as at June 2, when OPEC held its 169th conference in Vienna, Austria, was the supremacy battle between Saudi Arabia and the U.S. and lately, Iran. For as long as the U.S. produced large quantity of oil and gas from shale, and the conflict between Iran and Saudi Arabia remained unresolved, oil price could not have witnessed an increase.
Venezuela had wanted OPEC to change its policy to enable it come out of the woods but influential players like Saudi Arabia insisted on keeping production levels high, because they don’t want to lose customers to non-OPEC producers like the U.S. Therefore, any production cut could have triggered a short-term price increase.
THE Organisation of Petroleum Exporting Countries (OPEC) has predicted a more balanced global oil market in the second half of this year.
It based the prediction on the erosion of supply glut that has weighed on prices more quickly than expected, following outages in Nigeria and a wildlife fire in Canada as well as falling shale oil production in the United States (U.S.) .
In the oil cartel’s monthly report, OPEC said its production cut by 100,000 barrels per day (bpd) in May was led by Nigeria.
Persisted bombings of oil pipelines and facilities by restive youths, under the aegis of Niger Delta Avengers (NDAs), has forced a reduction in the daily production of crude.
According to the Head of Energy Research at EcoBank, Dolapo Oni, production has dipped from 2.2mbp to 990, 000 bpd: no thanks to pipeline vandalism.
Nigeria ranks seventh in terms of overall production of the 13-member cartel.
In a comment on short-term market disruptions in May, OPEC said: “Nigerian output slumped to levels not seen in over a decade on the back of a wave of militant activity.”
The OPEC report said that Nigeria crude oil production for last month averaged 1.4 millionbpd, down 15 per cent from the previous month. Production averaged 1.8 million bpd during the fourth quarter of last year.
Nigeria relies heavily on oil for a source of revenue. In its latest survey, the International Monetary Fund said the challenges for Nigeria’s economy are “substantial.” Government deficit has doubled and total exports are down roughly 40 per cent.
The IMF predicted that the Nigeria economy will decline for the rest of the year, while inflation runs close to 10 per cent.
It maintained forecasts of seasonally higher demand for its crude in the second half of the year and falling supplies outside the group.
The report states: “The excess supply in the market is likely to ease over the coming quarters. Shutdowns in Nigeria and Canada tightened the oil market markedly and brought supply and demand more closely into alignment earlier than many had expected, bolstering prices.”
The OPEC’s report also points to excess supply of 160,000 bpd in the second half of the year if the group keeps pumping at May’s rate.
According to the latest monthly report, OPEC recorded 2.59 mbpd excess supplies in the first quarter.
“Commercial crude stocks declined by eight million barrels in May. By contrast, global stocks increased by 12 million barrels in March and April, and by 19 million barrels in February”, the report said.
The chronic glut of oil forced market prices to their lowest point in 12 years in January, but as the excess supply dwindles, prices have rallied higher.
Oil has risen to $50 a barrel from the 12-year low of $27 in January as the outages curb excess supply. The OPEC’s reference price for May averaged $43.21 a barrel, a gain of $5.35 compared to the previous month.
“Provided that there is a clearer picture regarding oil supply and demand, the expected improvement in global economic conditions should result in a more balanced oil market toward the end of the year,” the 13-member group said yesterday.
The forecast said global oil demand growth would continue to rise by 1.20 million barrels a day year-on-year.
It said India would drive oil demand growth with China, adding that some support to that demand growth. It projected that demand for OPEC crude in the next six months was expected to average 32.6 million bpd, giving the group room to expand its current oil output.
Though the report has predicted a rise in the demand for OPEC crude, the cartel has repeated its prediction that markets would continue to see a contraction in supply from rival non-member producers to the tune of some 140,000 bpd, compared to the first half, and almost one mbd lower, compared to the same period last year. However, it cautioned that there is still a massive global supply overhang.
“I have always maintained that the oil market has been bullish since January. There is no doubt that the oil price has gone up faster than our expectation but I think we will hear a lot more talk now about prices hitting $55 or even $60 mark till the end of the year,” Mihir Kapadia, the Chief Executive officer of Sun Global Investments, told Khaleej Times.
He went on: “It will be important to note that if it goes too quickly there will be auto-corrections. People often talk about oil as trading within certain ranges.
“An increase in crude oil to $50 per barrel can actually be quite an important psychological shift and be indicative of a more significant move to come. Bankruptcies in the sector have been bringing down production in the U.S., this is seen as one of the key elements to the supply glut being reversed.”
He predicted that global oil stocks could begin falling by the end of the second quarter due to the disruptions in Canada and Nigeria.
His words: “Cheaper petrol is also expected to drive demand. The U.S. government estimates fuel demand for cars will surpass a previous record set in 2007 this year. But where exactly the market goes from here is anyone’s guess, so investors should be prepared for either eventuality. The much-anticipated rebalancing of the market may still take little more time.”
