Ramifications of an Opec-led production increase

Published: June 22, 2018 12:22 AM

Ramifications of an Opec-led production increase

On June 22, oil ministers will huddle together in Vienna to decide whether to spike up supplies after a 2016 decision to curb production to end a global oil glut. This has set the markets fluttering — expectations have ranged between an increase of 300,000 barrels a day up to 1.5 million barrels a day (mbpd).

The question that worries traders and consumer-countries alike is whether the extra production will be enough not to push up prices any further, and keep the pipelines flush, given the myriad of geopolitical variables — from the Iran sanctions imposed by the US, the political instability in Venezuela, Brazil and the Niger Delta, fresh attacks on Libyan ports, resumption of trade from Kirkuk oil field, possibility of a clash between Israel and Yemen in Syria, the emerging trade war between the US and China (affecting steel imports for infrastructure-building and the Chinese duty threat on US oil imports), and potential policy reforms in Mexico. It is important, however, to get a sense of how much the production cuts actually were after the producer cartel of the Organization of the Petroleum Exporting Countries (OPEC), consisting of 14 producing countries and its allies like Russia and Mexico, pledged a production cut of 1.8 mbpd starting January 2017.

Numbers from a Bloomberg analysis show that last month, the production cuts by the big players, like Saudi Arabia, were much deeper than the pledged figure. Saudi Arabia, whose declared cut was 486,000 bpd, actually curtailed production by 557,000 bpd from current levels in May and 637,000 bpd in April. Some of the other major cuts by producers that were deeper than promised, pushing down supply, were: Venezuela (675,000 bpd: actual, 95,000 bpd: target), Mexico (228,000 bpd: actual, 100,000 bpd: target), Angola (226,000 bpd: actual, 78,000 bpd: target), the UAE (148,000 bpd: actual, 139,000 bpd: target), Kuwait (137,000 bpd: actual, 131,000 bpd: target), Qatar (63, 000 bpd: actual, 30, 000 bpd: target) and Algeria (58,000 bpd: actual, 50,000 bpd: target).

It was essentially left to the smaller countries and Russia that produced more than what it had pledged: Russia’s production cut in May was 262,000 bpd, down from 263,000 bpd in April as opposed to its declared cut of 300,000 bpd. Similarly, Kazakhstan produced 203,000 bpd more than its current production levels as opposed to its actual target of an absolute cut of 20,000 bpd followed by Iraq (106,000 bpd; actual, 210, 000 bpd: target), South Sudan (51,000 bpd more than current production levels, 8,000 bpd: target), Malaysia (16,000 bpd more than current production levels, 20,000 bpd: target), Azerbaijan (13,000 bpd: actual, 35,000 bpd: target) and Bahrain (4,000 bpd: actual, 10,000 bpd: target).

Put together, in May the actual production cut was 2.318 mbpd and 2.132 mbpd in April, instead of the declared 1.8 mbpd, a deficit of 518,000 bpd in the global supply. If the Opec cartel indeed increases production by, say, 1.5 mbpd, then the actual oil flowing — factoring in the 518,000 bpd that was anyway lacking — would be about 1 mbpd.

Crude oil prices — determined by a play of demand and supply and by the futures market — sees itself staring into the grave supply impediment of the Iran sanctions, apart from negotiating the above-mentioned wildcards for the oil markets. Exports had fallen by about 1 mbpd in 2012 when sanctions were last imposed on Iran. Additionally, though shale reserves in the Permian basin has led to a surge of American crude production to 10.4 mbpd in 2018, production has recently run into infrastructure constraints. Pipelines to the Gulf Coast from the Basin, which covers all of West Texas and eastern New Mexico, are filled to capacity.

Large oil enterprises like Exxon and BP stopped exploring new reserves due to low oil prices before the 2017 production cuts precluding possibilities of new supply. Moreover, Venezuelan exports have fallen by 40% owing to long underinvestment in energy infrastructure, the simmering political crisis and the threat of American sanctions.

Weighing on the other side of the scale is the global demand of crude, which is estimated to grow by a robust 1.4 mbpd as per IEA or 1.6 mbpd as per Opec. A sentiment-driven bull market may be assuaged if the Opec were to indeed declare a production increase, but the actual oil flowing in the market and the crude oil prices are likely to remain unaltered in the near term. The argument that possible increases in production by the Opec cartel will cover up for dips in supply after Iranian sanctions are in place, and for flailing Venezuelan production capacities, may not hold water.

Shreerupa Mitra writes on UN affairs, human rights, health, humanitarian aid, WTO, oil politics and energy
Ujjal Kumar Das is a petroleum engineer at ONGC

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