OPEC Tries To Regain Control Of Global Oil Market

Throughout the summer and early autumn, there has been an endless round of announcements concerning production cuts and output freezes in crude oil. These were done in an attempt to reverse the sliding price of oil in global markets. The once all powerful oil cartel OPEC (Organization of the Petroleum Exporting Countries) was experiencing major difficulties, in trying to place a floor under world prices for crude.

Yet, as the 14 members of OPEC met in various locations and agreed in principle to reduce production, the global surplus in oil continued to rise. In September, the organization reported the highest level of crude output in eight years. In addition, it was forced to raise its growth forecast in 2017 for non-OPEC supplies of oil.

OPEC has calculated global demand for oil next year will rise by 1.15 million barrels. This does not take into consideration that the United States and a number of other leading economies, may well be in recession.

Inventories throughout the world are at or near all time highs, with only a slight draw down taking place in the last few weeks. Global crude output now exceeds 79 million barrels a day.

OPEC saw production rise within the cartel by 220,000 barrels a day, over August output. This brought the total inventory to 33.39 million barrels last month. The surge in supplies largely undermined the policy statements, that the present glut in oil was going to be reduced.

The rise in oil output last month originated mostly from Iraq, Libya and Nigeria, with the latter two restoring flows after disruptions due to civil strife.

The National Oil Corporation in Libya has opened up three previously blockaded ports, thus allowing areas in eastern parts of the country to increase the flow of oil.

In Nigeria, oil installations at Forcados and Qua Iboe are expected to soon begin operations again.

The present effort is the first time since 2008, that OPEC will seriously try to reduce overall global supplies. They are attempting to coordinate an agreement not only within the cartel, but are looking for outside cooperation as well.

OPEC has also raised its projection of non cartel output by 240,000 barrels a day for 2017. This was up 40,000 barrels from a previous forecast. It mostly was a result of rising production coming from Russia.

If the oil cartel keeps output levels at around 32.59 million barrels a day next year, which takes into account for an overall reduction of 800,000 barrels, there will still be a global surplus of an additional 800,000 barrels.

Saudi Arabia had previously permitted global oil prices to drop below $35 USD (United States Dollars) by the beginning of 2016. In North America, the price briefly touched a low of $26.00 USD this past February.

The Saudis had put in place a plan in November 2014, that would increase production at far lower prices, to gain market share by forcing out less efficient competitors.

This was an abandonment of the traditional policy of controlling output to maintain a higher price level. As a result, global prices of oil North America did indeed drop some 60% since late 2014.

Saudi Arabian total crude production has increased from 9.5 million barrels a day in 2014 to 10.49 million barrels now. In theory, the kingdom has the ability to ramp up output to 12.5 million barrels.

In the ensuing months, Saudi Arabia, Iran and Iraq all pumped ever larger quantities of oil. The return of Indonesia in 2015 and Gabon this year to membership in OPEC, has done little in helping to better manage the present glut in oil supplies

The fastest expansion in crude production earlier this year, was due to a spurt in production from Iran. When Western sanctions were lifted, the leadership of the country moved swiftly to return Iranian production to near previous levels.

It should be noted that Iran is now seeking outside investment to boost crude production even further.

Iran and to a lesser extent Iraq, have not agreed to an output freeze or cut. This is because according to their governments they are not producing at normal levels, due to sanctions in the case of Iran and war in the northern areas of Iraq.

The Iraqis state oil firm SOMO and the region of Kurdistan, have begun to jointly export crude from the Kirkuk oil region once again. This together permitted a rise in national output to a reported 4.43 million barrels a day last month.

Global oil production may well rise even higher in October, as supplies are brought back on line in both Angola and Nigeria.

The biggest challenge for Saudi Arabia, has been to force down rising American production. The widespread implementation of the drilling technique known as fracking and the general revolution in shale oil extraction, allowed output in the United States to rise substantially in the preceding years.

It increased from 6.5 million barrels a day in 2012 to 7.5 million in 2013. In 2014, there was a further surge to 8.7 million barrels, reaching a peak of 9.4 million in 2015. Production had surged 45% since 2012 and a total of 89% since 2008.

The near collapse in crude prices earlier this year, is what finally slowed overall output in the United States. The Saudi Arabian plan to lower prices with ever greater supplies, had worked relatively well.

However, greater efficiency and productivity in the energy sector, along with lower interest rates has allowed smaller operations to continue in business, far longer than had been anticipated.

By the middle of October, crude oil prices in the United States had surged 3% to a 15 month high, with an unexpected drop in domestic inventory levels. This allowed some respite to American producers.

OPEC member nations met in Algeria last month, to try arresting the supply glut that is depressing world prices for crude.

The dramatic decline in energy prices has created a serious strain on the national budgets of major producers including Ecuador, Nigeria, Russia, Saudi Arabia and particularly Venezuela. Without sufficient oil exports, these nations cannot fund present government operations.

The subsequent OPEC meeting in Istanbul, Turkey earlier this month, was deemed a success because Russia now backs an accord on reducing global supplies. As the world’s largest exporter of oil, their support for curbing output remains vital.

According to some reports, Russian production is now nearing 11.3 million barrels a day. This is within reach of the all time record set by the former Soviet Union in 1987. All analysts have the country producing at least a minimum of 10.4 million barrels a day.

Internal disagreements on how to share the burden of actual cuts among member nations remains unresolved.  

To move forward it was agreed that for now, Iraq, Iran and Nigeria will be exempt from making actual cuts in their total production. This was because output in all three countries, has been curtailed due to civil disturbance, war and sanctions.

The regular OPEC meeting scheduled for the end of November in Vienna, Austria is supposed to work out the plan to share the burden, in making actual cuts in production among member nations.

A freeze in crude production will fail to raise prices significantly, because that merely locks in place the present glut in global supplies.

Many nations within and without OPEC are already extracting oil at near or record levels.

It will be difficult to cap levels of output, when a number of nations most importantly Iran, still want to boost exports of oil.

Saudi Arabia is unlikely to agree to significant cut in production, if Iran is allowed to continue to increase oil deliveries. It would be a loss of market share for the former, which would undue the progress made since 2014. The two nations are still competing for dominance in the Middle East.

Saudi Arabia is likely to insist on roughly maintaining the present percentage of overall OPEC production of crude.

The other difficulty for OPEC, is how production for individual countries is measured. Figures are used based on data provided by member nations, but reports from media analysts and outlets are also part of the computation.

If a freeze or cut is to take place, member states within OPEC, will obviously want a higher allocation in the total amount allowed for export. Agreeing to what that precise level will be, is creating major discourse within the cartel.

An example of this comes with the report of Iraqis production. The government there reported total daily national output at 4.775 million barrels in September. Outside sources, put the level closer to 4.455 million barrels. If there is a freeze or cut, officials in Iraq would obviously like the higher figure to be used in the calculation.

This is also the case with both Iran and Venezuela.

There is no doubt the incentive to cheat on oil sales and total exports by nations operating under future OPEC restrictions, cannot be underestimated. Plus past commitments to cut production are not always met. In 2008, Azerbaijan promised to reduce output by 150,000 barrels a day. This was never implemented. That same year, Russia pledged a 400,000 barrels a day reduction, which was also unfulfilled.

An additional problem for OPEC, is the dilemma of higher prices itself. If crude prices go much beyond $60 USD, shale production in Canada and the United States in particular, become self sustaining and therefore profitable, once again.

That in turn, will increase American output and raise the global supplies of oil and natural gas. It is therefore in the interests of the oil cartel to keep global prices for oil above $50 USD, but below $60 USD.

So it is likely the present trend in the global crude market will continue in 2017. The glut in oil inventories will continue and the downward pressure on price will be maintained as a result. There will of course, be some fluctuation based on the valuation of the American dollar and overall economic growth in the leading world economies.