Just over a month remains until OPEC members assemble in Vienna for their semi-annual meeting. This November will mark one year since OPEC members and Russia agreed to a joint oil production cut that has been largely successful. Non-OPEC participants in the production cuts are again invited to join OPEC members in Vienna this coming November.
Producing countries are now in the process of deciding whether to support an extension of the production cut deal beyond the current March 2018 cut-off date.
Saudi Arabia: Khalid al Falih congratulated OPEC and non-OPEC members on achieving a 120% compliance rate with the deal in September but has not yet indicated whether Saudi Arabia will support extending the cuts. He reaffirmed Saudi Arabia’s commitment to reducing global inventories and told Reuters that Saudi Arabia is still considering whether an extension will be necessary. He said that at some point OPEC countries will begin to discuss “how we smoothly exit the current arrangement, maybe go to a different arrangement to keep supply and demand closely balanced.”
Iraq: This country is OPEC’s second largest producer, behind Saudi Arabia, and has struggled to cut production in accordance with its quota. In a recent meeting with Saudi Arabia, Iraq’s oil minister Jabar al-Luaibi, reaffirmed Iraq’s commitment to full compliance. However, the country also committed to increase production from southern Iraqi oil fields in response to a decline in exports from oilfields in the disputed Kirkuk region. Iraq has long sought an exemption from the OPEC production cuts and has not yet weighed in on whether it will support an extension of the deal past March 2018.
Iran: Iran’s oil minister recently stated that Iran has been pumping between 3.8 and 3.9 million bpd. Under the OPEC deal, Iran is permitted to pump as much as 4 million bpd as long as the country averages 3.797 bpd over the course of the year. Iran appears satisfied with these conditions, although the country expects to increase its production capacity to 4.7 million bpd by 2021. Since sanctions were lifted almost a year ago Iran has had only moderate success in attracting foreign investment for its oil industry. It signed one major deal with Total (NYSE:TOT), and that was for natural gas development. Iran does not appear to have the capacity to increase its oil production at this point, making it clear why oil minister Zangeneh has already come out in favor of extending the production cuts past March 2018.
Kuwait: The Kuwaiti oil minister made headlines last week when he suggested that OPEC and non-OPEC countries might not need to extend the production cut deal past March 2018, if all parties fully adhere to their production quotas.
Libya and Nigeria: If OPEC simply rolls over the current production deal, Libya and Nigeria will continue to be exempt from any production quotas. However, Iran’s oil minister is calling on Nigeria and Libya to join in the production cuts sooner rather than later. Nigeria recently said it hopes to produce 1.8 million bpd in 2018 at which point it would discuss joining the production cut deal. Libyan oil production, which has grown to 850,000 bpd from a low of 300,000 bpd last summer, is unlikely to increase much more. According to a Wood Mackenzie analysis, Libya is limited by a lack of access to capital that is necessary to further increase its capacity. If Libya understands this to be the case, the country may be more inclined to join the OPEC deal at an 850,000 bpd quota.
Ecuador: Oil Minister Carlos Perez has said he will request an exemption from OPEC production quotas in November because the country is facing a budgetary crisis. Given Ecuador’s limited influence in OPEC it is unlikely Ecuador will be granted an exemption.
Russia: Russia was the lynchpin that brought the original OPEC / Non-OPEC deal together last November. Russian President Vladimir Putin has already spoken out in favor of extending the production cuts through the end of 2018. Russian oil producer Lukoil (MCX:LKOH) on the other hand, does not support extending the production cuts if oil hits the $60 per barrel mark. (Brent Crude was hovering about $2 below that mark on Tuesday). The Russian oil minister also departed from Putin’s statement. He told reporters that it is too early to consider extending the deal.
Given recent gains in oil prices, it seems likely that oil ministers are still reserving judgment on a deal extension. They will wait to see if this upward trend in prices continues into November as the meeting approaches. This is not a bad policy given what happened last May at the OPEC meeting.
At that time, OPEC and non-OPEC countries made clear that the deal would be extended in advance of the meeting, so the decision was fully priced into the market in advance. Oil prices actually fell when the decision was announced at the May meeting, because investors had been hoping for the countries to make even larger production cuts. Hesitation now may keep the market on edge with a better chance for crude to rise (or fall) depending on the outcome of the next meeting.
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