By Nick Cunningham
OPEC officials are hoping to limit the production of both Libya and Nigeria, as fears grow that the two exempted members are undermining cuts from the rest of the cartel. Saudi Arabia is also promising to lower its oil exports in order to take more supply off of the market.
Saudi Arabia’s energy minister Khalid al-Falih reportedly cut short his vacation in order to attend the OPEC monitoring meeting in St. Petersburg on Monday, an unexpected move that put more weight on the details of the gathering. His attendance suggests OPEC is worried about the pace of rebalancing in the oil market, and also raises speculation about what OPEC might do next. OPEC’s Secretary-General Mohammad Barkindo said al-Falih decided to attend because of the meeting’s “strategic importance” and because of “the high expectations of the times,” the Wall Street Journal reported.
The WSJ also said that al-Falih was “very nervous,” and he spent the weekend on the phone with various OPEC officials.
There is a growing urgency from some members of the production cut deal to pressure Nigeria and Libya to agree to a cap on their oil production, as both countries have succeeded in ramping up lost output. “I think that as soon as these countries reach a stable production level, they must join other responsible producers and make their contribution to the measures aiming to rebalance the market,” Russia’s energy minister Alexander Novak said, according to TASS. Russia is not an OPEC member but joined in the pact to cut production
The WSJ reported that one OPEC official said Nigeria would agree to cap output once it reaches 1.8 million barrels per day (mb/d). However, the significance of that is undermined by the fact that Nigeria still has room to grow production up to the supposedly agreed upon 1.8 mb/d cap. Nigeria’s output stood at 1.6 mb/d in June and it will take some effort to grow production by another 200,000 bpd.
The meeting on July 24 in St. Petersburg was only intended for monitoring the progress of the output reductions; it was not expected to be an event that made new headlines. But the presence of the top Saudi energy official indicated concern within the cartel. “We must acknowledge that the market has turned bearish with several key factors driving these sentiments,” Khalid al-Falih told the OPEC monitoring committee.
He called on all OPEC members to boost their compliance after seeing commitments flag in recent months. Iraq and the UAE in particular have been laggards, while surging production from Libya and Nigeria have gone a long way to lowering the group-wide compliance rate.
Secretary-General Barkindo put on a brave face, arguing that the “rebalancing process may be going at a slower pace than we earlier projected but it’s on course. It’s bound to accelerate in the second half,” he said.
Last week, oil industry news reports suggested that Saudi Arabia was considering deepening its cuts to 1 mb/d, almost double what it is required to do as part of the OPEC agreement. On Monday, al-Falih said Saudi Arabia would limit its crude exports to 6.6 mb/d, a potentially bold move aimed at accelerating global inventory drawdowns. And al-Falih browbeat other members into improving their performance. “This is a collective effort,” al-Falih said after the meeting, according to the WSJ, noting that he spoke with several lagging members to “forcefully demand participation and the same level of commitment…We are not going to just sit back and watch.”
Capping Saudi exports at 6.6 mb/d would essentially mean taking an additional 600,000 bpd off the market, the WSJ notes, since Saudi exports averaged 7.2 mb/d in the first six months of the year.
That would be a bullish move that could help accelerate the rebalancing, but it also is a sign of how desperate Saudi Arabia is to see higher oil prices.
However, the headline figure of a reduction of 600,000 bpd is a lot less impressive when taking into account the fact that Saudi exports typically fall in the summer months anyway as domestic demand surges. Air conditioners run full blast in the summer as temperatures soar, and because Saudi Arabia still uses oil to generate electricity, more production is earmarked for the domestic market in summer months.
Still, the announcement is a signal that Saudi Arabia wants the rebalancing to speed up. “This is the Saudis saying they view the current market conditions as too weak and they are actually delivering,” said Bjarne Schieldrop of SEB. “It shows real additional willingness on their part to do something, which is hugely important, rather than sitting back and letting OPEC motions roll forward. They’re acting unilaterally and adding pressure.”
By Nick Cunningham of Oilprice.com