News from Saudi Arabia, Russia and Venezuela is pushing oil prices up this week. At the same time, there may be some negative news about the OPEC/non-OPEC partnership. Some deep sleuthing on Iraq’s production numbers may indicate that that country has been over-producing.
We finally have more information about whether Russia and OPEC may continue to collaborate in the long term. Reports came that crown prince Mohammad bin Salman, who is in the United States on a multi-city tour, said that Russia and Saudi Arabia are looking at extending the production cut deal. He reportedly said that the two parties are discussing the possibility of a 10- to 20-year agreement rather than a year-to-year agreement.
Before market watchers get too excited about the prospects of a 10-year production cut deal, remember that Mohammad bin Salman has never been intimately involved in oil policy and such a long-term production plan in the oil industry is unheard of and probably impossible. The crown prince is likely speaking based on a briefing he received on the discussions for a more permanent partnership between OPEC and non-OPEC countries like Russia.
Most likely the discussions have raised the possibility of a 10- to 20-year partnership, not a 10 to 20 year production cut agreement. If OPEC ever made a 10-year agreement, it would have to adjust within months, because no one—not even OPEC—can foresee market changes. Since OPEC does not even consider agreements longer than a year at a time and it is constantly adjusting those agreements, it can only be assumed that the prince was mistaken or that he simply meant the sides were discussing a partnership, not an agreement.
Most importantly, investors should not assume based on the prince’s remarks that the current production cut deal will automatically be extended into 2019. The OPEC and non-OPEC monitoring committee will be meeting on 20 April in Jeddah, Saudi Arabia. At the time, the committee will likely make a recommendation on whether the deal should be extended into 2019. OPEC will decide on this at its June meeting in Vienna.
Meanwhile, oil prices are getting a boost from production problems in Venezuela. Venezuela’s oil production has dropped significantly over the past 3 months – from 1.7 million bpd in December 2017 to only 1.57 million bpd in February. We can probably expect to see another drop in March given news of popular unrest among workers at Venezuela's state-owned oil and gas company Petroleos de Venezuela (PdVSA).
Platts also reported that PdVSA plans to shut three refineries indefinitely due to lack of crude oil for processing.
Venezuela is also planning to take a major crude oil upgrader offline for maintenance in April. This means that Venezuela will need to import more light oil to dilute its heavy crude until the facility is back in use.
This could be good news for American frackers, because most of the oil they produce and export is of the variety needed by Venezuela. However, the threat of new sanctions from the United States could make exporters concerned about entering into any major deals with Venezuela. So far, sanctions have not impacted the oil trade between the U.S. and Venezuela, but the Trump administration continues to mention the possibility of additional sanctions affecting the oil industry.
In other OPEC news, there is new evidence that Iraq may be cheating on its production quotas. According to data from S&P Global Platts, Iraq has been a chronic overproducer throughout the duration of the production cut agreement. Iraq’s allocation is 4.35 million bpd, but Platts data show that for the past three months Iraq has produced between 4.41 and 4.43 million bpd.
TankerTrackers.com has been examining Iraq’s reports of the country’s direct use of oil (oil that is burned for electricity and is not refined or exported) and has discovered what it believes are discrepancies that could indicate Iraq is failing to report an additional 36,000 bpd of production.
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