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What OPEC Can Do About Added Oil Production From Libya, Nigeria

By Ellen R. Wald, Ph.D.CommoditiesJul 12, 2017 06:50AM ET
www.investing.com/analysis/what-opec-can-do-about-libya-and-nigeria%EF%BF%BD%EF%BF%BD%EF%BF%BDs-growing-oil-production-200200493
What OPEC Can Do About Added Oil Production From Libya, Nigeria
By Ellen R. Wald, Ph.D.   |  Jul 12, 2017 06:50AM ET
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When OPEC’s technical committee meets in St. Petersburg at the end of July to evaluate compliance with the production cut deal, the big question will be what to do about Libya and Nigeria. These two countries were exempted from the across-the-board production cuts the rest of OPEC agreed to back in November 2016 because internal conflict in Libya and Nigeria had significantly reduced their oil production.

Libya’s oil production has been depressed for almost four years. Civil war and other violence caused Libyan production to decline by as much as 90% from its post-Qaddafi high of 1.5 million bpd in 2014. Recently, however, Libyan production has been growing, with the country producing 827,000 bpd in May 2017. This is the most oil Libya had produced since April 2014.

Not only has Libya’s oil production rebounded, but it also appears that these gains are not temporary. The effect of Libyan oil’s return to the market has weighed on oil prices, somewhat.

Nigeria is a similar case, though its production has been more volatile. Attacks by the Niger Delta Avengers, a separatist group that has long been aggrieved by the Nigerian government’s policies in the oil-producing region where the group is based, have at times sabotaged as much as half of Nigeria’s oil production. Violence, in the form of damage to pipelines and offshore oil platforms, appears to have subsided recently. This June, Nigerian production rose to 1.78 million bpd, its highest level since January 2016. According to the most recent OPEC survey from S&P Global Platts, Nigeria’s January-June production average, was 1.68 million bpd. Production is still unstable, because as recently as March, output was only at 1.2 million bpd.

At its most recent meeting, in May 2017, OPEC decided to let the two countries’ exemption continue. Technically, the deal currently permits Libya and Nigeria to continue with unfettered production for the rest of 2017 and into the first quarter of 2018, but there are some indications that OPEC may pressure these two countries to cut production sooner.

The OPEC and non-OPEC technical committee has requested that Libya and Nigeria attend its meeting on July 24 and report on their oil production. The committee’s intent is probably to consider making a recommendation to the larger group about whether to change the production status of either or both Libya and Nigeria at its upcoming regular meeting in November.

If Libya and Nigeria demonstrate sustained production over the next several months, then it is likely that in November OPEC will pressure the countries to cut production by 4.5%, the same rate as other members. If Libya and Nigeria do not experience any more disruptions due to violence or political instability, it is very likely that these countries will have no choice but to comply with the production cut.

However, market watchers should keep a careful eye on the numbers, because Libya and Nigeria may not actually be required to remove nearly as much oil from the market as might be assumed. The amount of oil these countries have to cut depends on the baseline (or reference) number that OPEC chooses.

The original OPEC deal used production numbers from October 2016 as the baseline to determine the production cuts. It is highly unlikely that OPEC will use the same baseline for Nigeria and Libya if (or when) their deal exemption is rescinded. OPEC will more likely chose a number that is significantly higher than their October 2016 production as a baseline, which will make Libya and Nigeria’s cuts less significant to the overall oil market.

What OPEC Can Do About Added Oil Production From Libya, Nigeria
 
What OPEC Can Do About Added Oil Production From Libya, Nigeria

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Tech Trader
TechTrader Jul 12, 2017 1:04PM ET
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Agreed. All indications on oil is not timid bullish.  But I won't be the only trader to punish OPEC if they fail to show their relevance in managing its members and oil.  The US Shale is a non-issue, the US consumes far more oil than it produces so fighting shale and US energy independence is not something OPEC wants to do.  We make money long or short on oil.  These petro-nations lose billions on these low oil prices.
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Do Deikins
DoRight Jul 12, 2017 12:19PM ET
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Dr. Wald, hope you take the opportunity to be at St.Pete (the Russian one, not the Florida one) at the time of the meeting.
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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Jul 12, 2017 12:19PM ET
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Wish I could...would love to travel there. Unfortunately not going to make it to that particular meeting.
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Mario Fernandes
Mario Fernandes Jul 12, 2017 8:15AM ET
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It's always interesting to read your articles on oil. Thank you.
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