OPEC largely wrong-footed markets and expectations by announcing their first production cut since the financial crisis of 2008 last week. This sent Brent front month "soaring" toward $55/bbl. This is certainly good news for producers and at face value bad news for consumers everywhere. But the deal and the way it is structured is far from straight forward. For example, there is a 285,000 bpd "typographical error" in the record of Iranian production in October in the OPEC press release, equivalent to about one quarter of the whole feeble deal. This is the stuff of dispute and of feeble deals unwinding.
Let me begin with a look at the guts of the agreement that are detailed in this undated press release. There are two key points and a table was published of the new production quotas (Table 1).
1) In the fulfilment of the implementation of the Algiers Accord, 171st Ministerial Conference has decided to reduce its production by around 1.2 mb/d to bring its ceiling to 32.5 mb/d, effective 1st of January 2017;
5) This agreement has been reached following extensive consultations and understanding reached with key non-OPEC countries, including the Russian Federation that they contribute by a reduction of 600 tb/d production.
The promise, therefore, is for a total 1.8 Mbpd reduction in OPEC + Russia. But then I came across this article at Oilprice.com that said:
Russia alone will cut 300,000 barrels per day. Asked about the non-OPEC contribution, OPEC President Mohammed Al-Sada said that he is confident that they "can get 600,000 barrels per day out of them…maybe more."
Table 1 Reference OPEC production from the OPEC press release based on Oct. 16 (apart from Angola that is based on Sep. 16). Production adjustment and new "quotas" for Jan. 1, 2017.
I decided to take a closer look at the numbers with a view to following this story as it unfolds, but quickly found a host of complexities that will make the deal difficult to monitor and to enforce, not least that 285,000 bpd typo in Iran's Oct. 16 production. I should begin by saying that I want to use my IEA data base of monthly production figures, and so the first challenge is to see if these are the same as the OPEC figures above. Let me run through a series of audit questions.
Table 2 OPEC reference production from Table 1. IEA reference production from the Nov. 16 OMR. Delta OPEC = arithmetic difference between the two. OPEC adjustment from the feeble deal (Table 1) apart from Iran that is based on arithmetic using real numbers. OPEC Jan. 17 based on OPEC Oct. 16 adjusted for OPEC adjustment. IEA Jan. 17 based on IEA Oct. 16 adjusted for OPEC adjustment.
In Table 1, Iran is recorded to have produced 3.975 Mbpd in October 16, while the OPEC Oil Market report suggests 3.690 Mbpd. Using the latter figure, Iran will be entitled to raise production by 107,000 bpd.
Auditing the labyrinth
OPEC-OPEC - Do the OPEC figures in the press release tally with the OPEC figures published in the OPEC November Oil Market Report (Table 5.7, p58)? The answer is yes, though not always exactly. And there is that single glaring typo for Iran where reported figure is 3.690 Mbpd and not 3.975 Mbpd as per the press release (Tables 1, 2). But wait a minute, OPEC publishes two sets of numbers. Table 5.7 based on secondary sources (this is the source clearly used in the press release) and table 5.8 based on direct communication where Iran has declared a production figure of 3.920 Mbpd much closer to the OPEC press release. Go figure.
OPEC-IEA - The comparison with IEA is largely satisfactory with a mean difference of only 12,000 bpd. But this masks some large negative and positive discrepancies (see Table 2). The IEA data will be revised in the next two months.
Libya and Nigeria were exempted from the deal owing to on-going civil unrest disrupting production. OPEC has excluded these countries from their table, while I include them with a zero adjustment.
Angola - October 2016 is the reference month for production cuts with the exception of Angola where September is used instead. There is a good reason for this since Angola experienced what appears to be a sharp cyclical fall in production of 170,000 bpd in October (see Figure 12). This is much larger than their OPEC adjustment, of 78,000 bpd. Hence Angola will be entitled to increase production from current levels!
Indonesia rejoined OPEC in December 2015 after a 7 year absence. The reason Indonesia left was because it had switched from being an oil exporter to an oil importer. It still was an importer in December 2015 as it is today. So it is unclear why OPEC allowed Indonesia to rejoin. In the event, Indonesia argued the corner of consumers and wanted prices to stay low and has suspended membership from OPEC again in protest.
Gabon rejoined OPEC on July 1, 2016 and was rewarded with a 9,000 bpd production cut. With 200,000 bpd production, Gabon sits within the rounding errors of the Gulf giant producers. I don't understand why OPEC should wish to have Gabon as a member, nor why Gabon should wish to be a member. This simply adds noise to the data.
How does it add up: taking into account the Iran correction, I reach a number of 1.147 Mbpd production cut by 1 January for a ceiling of 32.682 Mbpd that includes suspended Indonesia (Table 2). It is not clear if the declared ceiling of 32.5 Mbpd includes or excludes Indonesia.
Data, charts and consequences
Setting aside the labyrinth of statistics, I now want to place the planned cuts into context. The charts exclude Indonesia and Gabon and use the IEA data adjusted for the planned OPEC cuts (dashed line on each chart). I divide the OPEC countries into "strong" and "weak." The OPEC strong (Saudi Arabia, Iraq, Iran, UAE, Kuwait and Ecuador) are those who have managed strong production growth in recent years and arguably are making real production cuts. The OPEC weak (Venezuela, Nigeria, Angola, Algeria, Qatar) have witnessed a decade of production decline (Figure 3). Their quotas therefore are symbolic since natural decline would waste their production to agreed levels within months. For example, the OPEC weak have seen their production fall by 740,000 bpd already in 2016. Their projected cut of 253,000 bpd is paltry in comparison.
Figure 1 Looking at 12 OPEC countries (excluding Gabon and Indonesia) we see that the new production cap of 32.1 Mbpd (IEA datum) merely undoes the small production growth that has occurred this year. The total OPEC constraint amounting to 1.147 Mbpd will result in 419 Mbbls less oil produced in the course of a year. This number needs to be compared with OECD industry stocks of 1179 Mbbls at end September 2016 and OECD government stocks of 1287 Mbbls for a total of 2466 Mbbls in the OECD alone (IEA OMR Table 4). Adding in a further 300,000 bpd constraint from Russia brings the withheld production to 528 Mbbls.
My expectation is that this constraint may provide modest price support with a new price range of $50 to $70. Enough to send the US and Canadian frackers back to work that will quickly undo any price increase that may occur.
Figure 2 The last time OPEC cut production was in the wake of the 2008 finance crash where these 5 countries alone cut back 2.83 Mbpd reaching a low point of 18.94 Mbpd in February 2008. Since then, these 6 strong countries have grown production to 25.43 Mbpd in Oct. 2016. That's an increase of 6.49 Mbpd from February 2009. Their combined sacrifice under the new agreement is 885,000 bpd (Table 2), small compared to their increased strength over the last 8 years.
Figure 3 The 5 weak OPEC producers present a strikingly different picture. Note that Nigeria is included since Nigerian production has been on the skids since 2005, and while production may be marginally impacted by civil unrest right now, the overall direction is down (Figure 11). Libya is not included here since its inclusion would distort the picture.
The production from these 5 weak OPEC countries has been in decline since 2011 from a combination of above and below ground factors. Their new combined "quota" of 6.867 Mbpd (IEA datum) is barely below where they are right now. This comes about from Angola's reference month being September, not October that accounts for 170,000 bpd and using IEA instead of OPEC production data that accounts for another 63,000 bpd. The target reduction in this group is 253,000 bpd - JOB DONE!
- OPEC should disband and reform with five members: Saudi Arabia, Iraq, Iran, UAE and Kuwait. These are the large producing and exporting nations that have potential for swing production. All other exporting nations are there simply for window dressing. Excluding weak countries will have no impact on global supply-demand balance and it would streamline the decision making process, albeit in a politically tense atmosphere.
- The current deal, while no doubt well intentioned, is a dog's dinner that will prove difficult to police and enforce since the reductions are so small compared with statistical variances between different data sets that are revised over time. If I were Russian, I'd view the numbers with a degree of scepticism.
- Russia, I imagine, may contribute with a 300,000 bpd cut. But it is hard to see where the other 300,000 bpd may come from non-OPEC countries.
- The deal, if implemented, will provide limited short-term support to the oil price. This will send the frackers back to work which will likely undo any near-term gain in price by the end of 2017.
The Appendix below provides individual charts for xx OPEC countries.
Appendix: OPEC country charts and commentary
The following charts are based on IEA monthly data. The dashed line represents the new "quota" applying the OPEC "adjustment" to October 2016 IEA data.
Figure 4 Saudi Arabia, as is usual in OPEC, shoulders most of the responsibility as the largest producer. Saudi Arabia's cut of 486,000 bpd takes The Kingdom back to the pre-Jan. 15 bumpy plateau production level. The Kingdom will for a short while enjoy increased revenues and decreased expenditure, maintaining these high production levels.
Figure 5 Iraqi production has shown truly miraculous growth since the end of GWII. Oct. 16 4.59 Mbpd production outstrips historic records by a long margin. I am unsure if the IEA stats include production from Iraqi Kurdistan, perhaps commenters can elaborate. Pegging production to 4.38 Mbpd simply undoes the surge of recent months.
Figure 6 Iran has bounced back from sanctions, but may rediscover gravity under President Trump. Under the feeble deal, Iran may increase production by as much as 107,000 bpd if its reservoirs and infrastructure are up to the job.
Figure 7 The UAE has certainly surprised me by growing production from 2 Mbpd in 2002 to over 3 Mbpd last month. Pegging production to 2.94 Mbpd simply undoes the production growth of the last few months.
Figure 8 Kuwait has also boosted production in recent months and the new quota sees this reversed and Kuwait return to more comfortable plateau production levels.
Figure 9 OPEC minnow Ecuador is included with the strong countries because it has shown resilience since 2009. The cut of 26,000 bpd is of no consequence for anyone but will help Ecuador maintain plateau production that it has done skilfully since 2004.
Figure 10 With Venezuela, we move onto the weak producers. Because of political management, Venezuelan production has been declining for 5 years. On current trajectory, Venezuela will meet its new quota without showing constraint within months. This, of course, provides good cover for political incompetence!
Figure 11 Nigeria is not included in the feeble deal. But the production history shows production in decline from a combination of geology, political management and civil unrest. Are any of these about to end soon? I don't think so.
Figure 12 Angola, with exclusive offshore oil production, is rather like the UK. It is faced with high costs, but with the protection offered from civil unrest by offshore operations controlled by IOCs. Production has effectively been on a bumpy plateau since 2008 and is marked by cyclical downturns that may be linked to maintenance programs. One such downturn occurred in Oct. 16. Hence Angola's new quota, based on Sep. 16, actually lies above current production levels.
Figure 13 Algeria is principally a gas producer with pipeline links to Europe. Many years ago, they nationalised all their oil industry but then invited IOCs back. They were successful in opening up new plays, especially oil in the Berkine Basin. My company did a fair amount of work for these brave new operators and I actually had staff visit the area. But the Algerian authorities did everything they could to confound timely and profitable exploitation of these new-found riches by foreign companies. Algerian oil production has been on the skids since 2008 and will meet the new production ceiling of 1.07 Mbpd without the need to exercise constraint.
Figure 14 Qatar is a giant natural gas and natural gas liquids producer and is not to any significant extent dependent upon oil production. Without checking, I believe they have one significant oil field that now appears to have passed peak production. Hence relegation of Qatar to division 2 of oil producers.
Figure 15 I conclude with Libya that is excluded from the OPEC feeble deal. Utterly destroyed by the Arab Spring, UK and French bombing, misguided intransigence by the UN and the USA, is now the conduit for the disaffected and disenfranchised populations of the whole of Africa into Europe. The EU needs energy, not refugees. This chart shows a clear picture of how the EU has failed its people and the people of North Africa. It is time for change!