Something odd happened on the way to the recently “agreed upon” OPEC production cut: instead of cutting production, OPEC countries have seen their oil output surge, and according to an IEA reported released today, the oil producing countries pumped oil at record-high volume last month, while officials from three member countries, those exempt from the “deal”, said they plan to raise output even more in the near future.
OPEC increased output by 160,000 barrels a day to a record 33.64 million barrels a day in September, the IEA said, a rather stark departure from last month’s Algiers agreement where most OPEC members agreed to bring output down to a maximum of 33 million barrels a day.
The increased production shows, among other things, not only just how farcical the recent oil surge has been on the back of expectations that somehow OPEC will actually not only agree on lower production quotas and more importantly comply with then, but also how much work OPEC must do to achieve production cuts it agreed to last month in an attempt to end a crude glut that has depressed prices for two years.
“Now the real work starts,” the IEA, which advises industrialized nations on energy policy, wrote in its monthly report. The market—if left to its own devices—may remain in oversupply through the first half of next year, it said.
The work will be even more difficult as a result of the deal exemption granted to Libya, Iran and Nigeria, who are now scrambling to capture as much market share as possible before the OPEC deal is effected, if ever. As the WSJ reports, last month, production from Iran, Libya and Nigeria increased by a collective 120,000 barrels a day over August levels, the IEA said. In the near term, officials from those countries say they aim to boost daily production by another 580,000 barrels or so—an amount about equal to the total volume OPEC said it would cut.
Further increases from those countries “would suggest that bigger cuts would have to be made by others, such as Saudi Arabia,” the IEA said. Saudi Arabia, OPEC’s largest producer, saw output fall by about 20,000 barrels a day to 10.58 million barrels a day from August to September, the IEA said.
As many warned previously, the potential supply that could come from the trio of countries could jeopardize any deal, and it took just one month to get confirmation.
Rising production in Libya, Nigeria and Iraq is due to a convergence of disparate factors. In Libya, years of fighting that blocked oil ports ended recently when a militia took control of key export facilities and agreed to restart shipments. The government also plans to link long-dormant oil fields to a new export pipeline. Libyan officials say the country’s production could rise from 300,000 barrels a day in August—the baseline that OPEC used in calculating its proposed production cap—to 700,000 barrels a day.
After years of depressed oil production under the weight of Western sanctions, Iran is slowly ramping up its exports now that those penalties are lifted.
Nigeria, where oil thieves and rebel groups have sabotaged oil facilities, is adding up to 200,000 barrels a day after it repaired a key pipeline that had been damaged and was out of commission for months.
Furthermore, as we pointed out just after the Algiers deal was signed, a just as substantial challenge for OPEC is dealing with Iraq, which has protested the data OPEC is using to calculate production. Iraq says the independent analysis firms OPEC relies on understate Iran’s recent production and could result in the country being forced to adopt an unfairly low cap. The IEA said Iraq increased output by 90,000 barrels a day last month over the previous month.
Making matters worse for the “deal”, OPEC is also pinning hopes for reducing the crude glut on producers outside the group, mostly Russia. Speaking on Monday at an energy summit in Istanbul, Vladimir Putin said Moscow could join the cartel’s production cuts. But last month, his country boosted production of crude and natural-gas-liquids by about 400,000 barrels a day to a post-Soviet high, the IEA said.
However earlier today Igor Sechin, Russia’s most influential oil executive and head of energy giant Rosneft said his company will not cap oil production as part of a possible agreement with OPEC.
His comments underline how difficult it is for Russia to get its oil companies to freeze or cut output as part of a potential deal with the Organization of the Petroleum Exporting Countries designed to support oil prices.
“Why should we do it?” Sechin, known for his anti-OPEC position, told Reuters in Istanbul on Monday evening, when asked if Rosneft, which accounts for 40 percent of Russia’s crude oil output, might cap its production.
Head of Russian state oil firm Rosneft Igor Sechin
Earlier on Monday, Sechin told reporters that Rosneft planned this year to raise its oil production, already the world’s largest among listed producers, above the 203 million tonnes (4.1 million barrels per day) it produced in 2015.
Sechin said he doubted some OPEC countries, such as Iran, Saudi Arabia and Venezuela, would cut their output either: “Try to answer this question yourself: would Iran, Saudi Arabia or Venezuela cut their production?”
The answer, of course, is no. But it will take the algos some time to figure it out.
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Finally, in a note released overnight, Goldman Sachs analyst Damien Courvalin said that “the post-Algiers rally in oil prices has continued, fueled by comments by Russia and Saudi Arabia today (October 10) that point to a greater probability of reaching a deal to cut production.” He notes that Saudi Arabia likely holds the reigns to such an agreement, with signs of elevated funding stress potentially driving Saudi to commit on November 30.
In light of the latest news, we would suggest that the probability of an agreement is slim to nil.
And indeed, as Courvalin notes, “the risks of a disagreement are not negligible with Iraq currently the most vocal opponent, aiming to grow production next year and disputing usual measures of its production as too low. Failure to reach such a deal would push prices sharply lower to $43/bbl in our view as we forecast that the global oil market is in surplus in 4Q16.“
Goldman’s conclusion: “Net, we find that an agreement to cut production, while increasingly likely, remains premature given the high supply uncertainty in 2017 and would prove self-defeating if it were to target sustainably higher oil prices.”
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