By Stuart Burns
When the Organization of Petroleum Exporting Countries stated at their September meeting in Algiers that they would work on an agreement to cut production, many thought it was empty words intended to save face following yet another failed meeting. The target to cut production to between 32.5 and 33 million barrels a day left out any detail as to how those cuts would be shared. But it would seem OPEC producers, along with some cooperating non-OPEC members such as Russia, have been continuing to work behind the scenes in preparation for the next planned meeting on Nov. 30.
A CNBC article reports that significant progress has been made, and at the very least a production freeze is achievable, as well as possibly some cutbacks, probably led by Saudi Arabia. Ever since the last meeting both OPEC and non-OPEC producers have been ramping up production in anticipation of an agreement being reached on a freeze.
In itself, this makes something of a mockery of attempts to reduce oversupply, but in a world of financial deficits every country has been trying to game the system to its own advantage. CNBC reports that, as a result, production was up 240,000 barrels a day to more than 33.6 million barrels a day in October.
Who Cuts What?
The biggest contributors to the increase were Iraq, Libya and Nigeria. At 11.55 million barrels a day in October, Russia is also running at maximum. It's not surprising that in a recent press interview Vladimir Putin is quoted by Bloomberg as saying: "There's no difficulty for us to freeze production at current levels."
The question is, of course, how much of an impact a simple freeze would achieve. Most believe that some form of production cut is required to support prices. CNBC quotes analysts who say the biggest cuts would have to come from Saudi Arabia, Kuwait and the United Arab Emirates. Concerns remain about Nigeria, Iraq and Iran, all of which have sought exemptions while Libya would like to see it's output rise to 900,000 barrels a day, which is still short of their pre-civil war level.
However, what producers say in public and what they agree to in private might not be the same thing. Certainly, the prospects of limited production cuts seem, for the first time in two years, to be achievable. Ironically, the biggest beneficiary of OPEC's efforts could be U.S. shale producers. The nimble and increasingly competitive U.S. shale market is likely to respond positively to sustained prices of about $50 a barrel.
This, as much as poor production discipline among OPEC producers, will likely cap oil price increases in 2017. Looking further out, President-elect Donald Trump's support for the fossil fuel industry and promises to open up Federal lands for exploration will further undermine the ability of OPEC to achieve a sustained uplift of prices through the close of the decade.