Following on from my last report – After six months of intense discussions and meetings, OPEC and its non-OPEC counterparts have finally agreed a deal to cut oil output by around 1.8mbpd. What they seem to have forgotten is that since OPEC decided to follow the strategy to keep pumping back in December 2014, its members have increased their own output by 3.8mbpd. Nevertheless, the fall in US shale production has offset some of that by around 600,000 bpd but, even so, there is still another 3mbpd extra in the market from OPEC alone and we therefore have to ask how far will the cut of 1.8mbpd go towards bringing forward the supposed balancing of the market which would have taken place anyway next year.
The sense of urgency from Saudi demonstrates the dire situation the Kingdom is in, and the expressions of Khalid Al-Falih, the Saudi Oil Minister, and Mohammad Barkindo, the Secretary General, reflect the tireless effort that the two of them have put in. They have been instrumental in securing the deal but hardly look overjoyed.
Conversely, Dr. Mohammed Bin Saleh Al-Sada, the OPEC Conference President and Alexander Novak the Russian Energy Minister, in the picture below, seem particularly excited. They are in the limelight and no doubt delighted with the achievement as all producers must be across the world.
Lower down the scale, some of the lesser members such as Algeria and Venezuela, who handled much of the lobbying to secure the deal, are feeling more pressure. Particularly Venezuela which has squandered its oil wealth over the years and not bothered to re-invest in the infrastructure while severing connection with international oil companies and supposedly managing the industry without a competent team or structure in place. They still want a price of $100+ and I don’t think that anyone can foresee that in the near future.
Last week at the 171st Meeting, allocations were given to each OPEC member who supposedly agreed to honour these ceiling levels from 1st. January. They can all pump as much as they like in the meantime. Saudi made it clear that it would not cut if non-OPEC producers wouldn’t come in. The gamble was that it would walk away and perhaps even increase output hurting both OPEC and non-OPEC producers. With the Russian administration saying it wouldn’t or couldn’t cut, there was a last minute telephone call between Khalid Al-Falih and President Putin and the agreement was made, subject to confirmation on 9/10th December.
For Russia to cut output it is very difficult. Much of the territories in which the oil is produced are frozen and therefore stopping and starting has never been practical. Current output has reached 11.2mbpd and it will be interesting to see what the figure becomes, once Russia manages to comply and cut. This should take effect from 1st. January but there is a chance that it won’t happen until later, perhaps when the weather is milder. Nevertheless, President Putin has given his word. But, the last time Russia agreed to cut, some fifteen years ago, it reneged on the deal and didn’t and Saudi will not have forgotten that. Yet from Russia’s view point the loss of 300,000bpd against and extra $6-10pb on whatever it exports has to be beneficial.
Years ago, as Russian exports were dropping off dramatically and a shortage was expected, their exports returned, as quickly as they had fallen off. Russia had decided, in the depths of winter, to cut the domestic supply and switch it to export, irrespective of the consequence to its people. So perhaps, if there is to be a true cut, they could simply apply it to the domestic market and maintain exports at the higher price – comply with the agreement and benefit from the increased revenue. Along with Russia, Mexico, Oman and Azerbaijan will make some kind of a gesture to show a reduced output but probably through natural decline which would have happened anyway so not really part of this equation. Yet, for the main players there has to be some level of compliance to show for the effort and to gain some level of credibility.
In the past OPEC members have proved untrustworthy in terms of keeping to agreements and this time a new committed has been set up by Algeria, Venezuela, Kuwait and Russia together with one other to be named. Their role is to monitor and check compliance, something OPEC has never done before. Furthermore, with Russia on board, Saudi can commit further and cut below 10mbpd to make up any shortfall from either side to get the deal work, something it would not have done without Russian support. The market is very sceptical that it can be held together and focus will be very much on the committee and what it is able to report next year in time for the OPEC Meeting in May. If it works, the strategy could run for another six months, if not, the market will crash even as supply and demand come together anyway. Meanwhile, they may well see $60 in the short term although they are hoping for more in the longer term.
Any comments or queries, please contact me – John Hall, John.Hall@Alfaenergy.co.uk +44 7880 367773 or + 44 7785 274530.