Oil cut deal: OPEC to deepen cuts

Indications have emerged that the Organisation for Petroleum Exporting Countries (OPEC) is likely to extend its cut deal to late 2017 or even 2018.

This is because Saudi Arabia’s oil minister said on Tuesday that oil producers would “do whatever it takes” to rebalance the market and that he expected a global deal on cutting crude output to be extended to the end of 2017 or possibly longer.

OPEC and non-OPEC producers promised to cut output by 1.8 million barrels per day (bpd) in the first half of the year to boost crashing oil prices.

However, global inventories have remained high, dragging crude price back below $50 per barrel and putting pressure on OPEC to extend the cuts to the rest of the year.

“Based on consultations that I’ve had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond,” Saudi Oil Minister Khalid al-Falih said.

“The producer coalition is determined to do whatever it takes to achieve our target of bringing stock levels back to the five-year average,” he said.

Falih said recent price falls had been caused by seasonal low demand and refinery maintenance, as well as by non-OPEC production growth, especially in the United States.

U.S. boosted oil production more than 10 percent since mid-2016 to 9.3 million bpd, close to the levels of top producers Russia and Saudi Arabia.

Despite this, Falih said markets had improved from last year’s lows, when crude prices fell below $30 per barrel.
“I believe the worst is now behind us with multiple leading indicators showing that supply-demand balances are in deficit and the market is moving towards rebalancing,” he said.

“We should expect healthier markets going forward.”

He said he expected global oil demand to grow at a rate close to last year. In China, oil demand growth should match last year’s due to a robust transport sector, while India should record healthy growth, he said.

OPEC and industry sources have also hinted that there had been discussions about extending curbs until the end of the first quarter 2018, when crude demand is seasonally at its weakest.

The chairman of energy consultancy, FGE, Fereidun Fesharaki, said: “They (OPEC) are looking at (extending) for nine to 12 months. Six months is not enough as we’ll still be well above five years average of stocks.”

Falih said almost all of the expected oil demand growth in the next 25 years was likely to come from Asia as the region’s population grows, with countries such as Vietnam and the Philippines rising into the ranks of top 20 global economies.

Asia would also account for nearly two-thirds of global gas demand by that time, he said.
Global investments in exploration and production have also fallen behind, potentially creating a big supply-demand gap in the next few years, he said.

“Conservative estimates predict that we will need to offset 20 million barrels per day in combined demand growth and natural decline over the next five years,” Falih said.

“That is why I fear … we are heading into a future of supply-demand imbalances.”
In May, a joint committee of ministers from OPEC and non-OPEC oil producers recommended extending the oil cut output deal by six months.

According to a draft press release from their meeting, the Cartel agreed that there was need to extend the global cut deal to reduce oil output.

OPEC and rival oil-producing countries met in Kuwait to review progress with their global pact to cut supplies.

The oil ministerial committee “expressed its satisfaction with the progress made toward full conformity with the voluntary production adjustments and encouraged all participating countries to press on toward 100 percent conformity,” said the draft, seen by Daily Times.

The cut which took off in January, has lifted crude local to more than $50 a barrel.
Seeing the price gain, the U.S. shale oil producers which were not part of the deal, were encouraged to boost output.

The committee said it acknowledged that certain factors such as low seasonal demand, refinery maintenance and rising non-OPEC supply, had led to an increase in crude oil stocks and it also observed the liquidation of positions by financial players.

“However, the end of the refinery maintenance season and noticeable slowdown in U.S. stock build as well as the reduction in floating storage will support the positive efforts undertaken to achieve stability in the market,” it said.

Before the meeting, Iraqi Oil Minister, Jabar Ali al-Luaibi, told reporters there were some encouraging elements that suggested the oil market was improving, and that if all OPEC members agreed measures to help price stability, Iraq would support such steps.

“Any decisions taken unanimously by members of OPEC … Iraq will be part of the decision and will not be deviating from this,” Luaibi said.

Iraq’s oil production is running at 4.312 million bpd in May, Luaibi said, adding that his country had cut its oil exports by 187,000 bpd so far and would reach 210,000 bpd in a few days.

Compliance with the supply-cut deal was 94 percent in February among OPEC and non-OPEC oil producers combined, Russian Energy Minister Alexander Novak said.

On its part, Nigeria has been excluded from the cut deal until the country recovers from loss of its market share due to unrest in the Niger Delta.

In February, Nigeria ramped up its oil output by 9.3 percent, making 1.64 million barrels a day.

OPEC members not required to cut added a total of 270,000 barrels a day in January.

Libya increased production to 690,000 barrels a day, the highest level in more than two years.

Iran, which was allowed to continue restoring output to pre-sanctions levels, pumped 3.8 million barrels a day, the most since 2010.

Nigeria’s increase in production comes on the heels of announcement that OPEC had reduced output by 91 percent.

According to Platts, the 10 OPEC countries have achieved a 91 percent compliance rate with the targeted cuts.

Then in March, Nigeria’s crude oil production dropped by 200,000 barrels per day.
This is because Shell Nigeria Exploration and Production Company (SNEPCo) halted production at the Bonga oil field.

According to information gathered, the shutdown commenced on March 4 due to maintenance routines and will last at least a month.

SNEPCo said in a statement that Bonga, Nigeria’s first deepwater development, was expected to resume production at some point in April, without giving further details.

The Daily Times gathered there were no exports planned for March. Bonga exports roughly 200,000 barrels per day (bpd).

Bonga produced an average of 192,500 bpd of oil in 2015, according to the latest annual data from Nigerian state oil company, Nigerian National Petroleum Corporation (NNPC).

The nation’s first deepwater development has capacity to produce 225,000 barrels per day (bpd) of oil and 150 million standard cubicfeet (scf) of gas.

The new development has forced Nigeria’s oil production down to 1.875million bpd, from the 2.1 million bpd recorded in recent time.