OPEC on Verge of 9-Month Cuts Extension After Iraq Backing

EghtesadOnline: OPEC and its allies were poised to continue their production cuts for another nine months after Iraq backed an extension, removing one of the last remaining obstacles to an agreement.

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23 May 2017

The proposal is the latest attempt by oil producers from Saudi Arabia to Russia to prop up prices and revive their economies. The talks in Vienna are closely followed elsewhere as they can affect everything from the share price of Exxon Mobil Corp. to the Brazilian real and Nigerian sovereign bonds, Bloomberg reported.

“The trend now regarding the output deal is to extend for nine months,” Saudi Minster of Energy and Industry Khalid Al-Falih said on Monday. “All I talked to from inside OPEC are supporting the nine months of cuts.”

Although OPEC delegates and minister signaled a growing consensus ahead of the meeting on Thursday, Kuwait’s Oil Minister said some nations still aren’t on board. The most influential members of the deal, including Russia and Saudi Arabia, have publicly backed supply curbs lasting until March 2018. Kazakhstan and Iran are among the nations not to have expressed a view in public.

“Not everybody” is on board yet for nine months, Kuwait’s Oil Minister Issam Almarzooq told reporters Tuesday, before leaving his country for Vienna. He said that OPEC and its allies weren’t considering deeper cuts.

OPEC is notorious for trying to wrong-foot the market with last-minute announcements in an effort to lift oil prices, so traders are on edge ahead of the talks.

Something Extra

“The market is expecting ‘something extra,’ especially as Saudi Arabia and Russia have already committed to extending the deal by nine months," said Amrita Sen, chief oil analyst at Energy Aspects Ltd.

The Organization of Petroleum Exporting Countries and 11 non-members agreed last year to cut output by as much as 1.8 million barrels a day. The supply reductions were initially intended to last six months from January, but the slower-than-expected decline in surplus fuel inventories prompted the group to consider an extension. Data from the U.S. Energy Information Administration indicate that maintaining the curbs into the first quarter of 2018 would bring stockpiles back in line with the five-year average -- OPEC’s stated goal.

While OPEC has had some success reducing the oil glut, somewhat higher prices are helping its biggest foe: the shale industry. U.S. production has already jumped 500,000 barrels a day to 9.3 million since Saudi Arabia started to discuss the cuts in late-2016.

With shale companies turning into leaner and fitter outfits able to thrive at $50 a barrel, more is coming, with the EIA predicting U.S. output will hit a record above 10 million barrels a day next year.

Harsh Reality

"A harsh reality may emerge, likely well after the May 2017 meeting, that the price at which shale can grow quickly could be much lower than the price OPEC members want and need," said Jamie Webster at the Center on Global Energy Policy at Columbia University.

OPEC may face another challenge next year in its quest to re-balance the market after U.S. President Donald Trump announced a proposal to sell half of the country’s strategic petroleum reserve, which holds nearly 700 million barrels, starting next year.

With the problem of shale output and the strategic petroleum reserve looming for next year, OPEC is in a hurry to hammer a deal now that reduces the glut. Al-Falih achieved a notable success toward that goal on Monday when he secured the support of Iraq after a last-minute -- and rare -- trip to Baghdad.

Iraq, the cartel’s second-largest producer, had previously favored prolonging the historic deal by just six months. The Saudi oil minister secured the nation’s backing for a longer extension after talks with his counterpart Jabbar Al-Luaibi. Non-OPEC nations Oman and Mexico also confirmed their support for a nine-month extension.

Rebalancing Market

OPEC ministers believe that nine months of extra cuts would be enough to finally re-balance the market. “We need to give the market some more time,” United Arab Emirates Energy Minister Suhail Al Mazrouei said on Tuesday on the sidelines of a conference in Abu Dhabi.

The deal “has been working and I know it will work even better for the second half," he said, before traveling to the Austrian capital.

Brent crude dropped 0.5 percent to $53.61 a barrel as of 12:07 p.m. in London. That’s 6.2 percent higher than the price reached on the day of OPEC’s last meeting on Nov. 30.

If OPEC maintains its April crude production of 31.8 million barrels a day throughout the rest of the year, oil stockpiles will shrink, according to the International Energy Agency. Even so, “stocks at the end of 2017 might not have fallen to the five-year average, suggesting that much work remains to be done,” the IEA said in its monthly oil market report on May 16.