On Monday July 24, the members of OPEC's technical committee met in St. Petersburg, Russia, to assess continued compliance with the OPEC and non-OPEC partnership deal. This meeting was particularly contentious, because participants are dissatisfied that oil prices fell in May and June despite their renewed commitment to production cuts.
The committee discussed oil production from Nigeria and Libya, the two OPEC countries that have been exempt from the deal so far. Rising oil production from both of these countries has been cited as a reason why oil prices did not move higher in May and June. While OPEC countries might be forgiving toward Nigeria and Libya, non-OPEC participants in the agreement seem to be more demanding toward them.
At the meeting, Nigeria agreed to cut or cap its production at 1.8 million bpd once the country stabilizes production at that level. There was no indication of when that might be, especially in light of recent news of more terrorist sabotage of Nigerian output. Also, Royal Dutch Shell (NYSE:RDSa) recently announced that a leak led them to shut down the trans-Niger Pipeline, which has been the target of numerous attacks by rebels and thieves.
After Monday's meeting, OPEC did not provide specifics regarding any decisions on Libyan production. However, in an interview with S&P Platts Global, the Omani oil minister, who attended the meeting as a non-OPEC participant, chided Libya for announcing its plans to increase oil production to 1.25 million bpd. This kind of talk, he said, is keeping oil prices from rising.
Nevertheless, Libya may not be able to reach this mark for quite some time, since some of its oil facilities have still not been repaired following terrorist attacks. Libya is making an outlandish production claim in order to achieve the highest possible cap when OPEC inevitably forces it to join the production cut agreement.
The price of oil climbed about 3% after the meeting, likely based almost entirely on comments by Khalid al-Falih, the Saudi oil minister. He told reporters that Saudi Arabia intends to cut its exports (not production) in August to 6.6 million bpd. The last time Saudi Arabian exports were that low was in March 2011, according to data from JODI.
Khalid al Falih also mentioned the possibility of introducing a mechanism to cap and monitor oil exports in addition to production. It has become clear that export numbers are impacting oil prices and hindering OPEC’s ability to rebalance the oil market. OPEC cannot focus on production levels alone.
For example, Iranian production has remained within the limits of its cap, but the country has exported beyond what its production levels would indicate by selling off stored oil and condensate. Technically, Iran has complied with the production cut agreement, but it has sent more oil into the global market, which lowers the price.
Adding a mechanism to regulate exports on top of the production caps could help speed the rebalancing of the oil market, but it would be extremely difficult to achieve. As Russian oil minister Alexander Novak said in an interview with S&P Platts Global, Russia’s exports vary seasonally so setting monthly export caps would be very difficult to manage. This is true of many participating countries, especially those that still rely heavily on oil for domestic electricity generation.
Another problem facing the OPEC and non-OPEC partners in their attempt to stabilize the oil market: they only regulate crude oil, not refined products. Some oil producing countries, such as Saudi Arabia, have robust domestic refining industries and could export refined oil products to compensate for lower crude oil exports.
OPEC and non-OPEC countries continue to monitor production levels, and they may begin monitoring exports. The compliance of participating countries over the next three-and-a-half months will have a major impact on any decisions OPEC and non-OPEC members make at their semi-annual meeting in November.
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