Hope dims for oil price recovery

The Organisation of Petroleum Exporting Countries (OPEC) seems frustrated by the prevalent low oil prices. Reuters reports that OPEC officials are bewildered by the lack of movement in crude prices even after the US Gulf Coast was inundated by the worst rain event in the country’s history. Brent crude, the international benchmark, is trading at about $53 a barrel, around the same level as when production cuts were agreed in May.

“It seems no event will move the oil price up much,” an OPEC official told Reuters.

Again, investment banks have slashed oil price forecasts.  The average prediction from the 14 investment banks puts Brent crude at $54 per barrel in 2018, down $1 per barrel from forecasts a month earlier. It marked the fourth consecutive month that major analysts cut their price forecasts. The big reason is the expectation that the OPEC deal expires next year and the group ramps up production.

OPEC oil output has fallen this month by 170,000 barrels per day (bpd) from a 2017 high, as renewed unrest cut supplies in Libya and other members stepped up compliance with a production-cutting deal.

A dip in supply from top two producers Saudi Arabia and Iraq helped to boost OPEC’s adherence to its output curbs to 89 percent, up 5 percentage points from July but still short of the levels above 90 percent achieved earlier in the year.

The decline from Libya, and the lack of a further sizeable increase from Nigeria, will ease concerns that extra barrels from the two nations could swamp cutback made elsewhere. Libya and Nigeria were exempt from the cuts because conflict had curbed their production.

Whither output cut?

Members of OPEC agreed in May to maintain curbs on production until March 2018 as part of efforts to reverse a drop in crude prices which has their economies and budgets. The cuts came into effect in January after an initial deal in November 2016.

High compliance and much-reduced output in the exempt countries pushed supply lower in early 2017. But extra Libyan and Nigerian production, and slipping adherence in some countries, prompted output to rise to a 2017 high last month.

To address this, ministers at a July 24 meeting moved to cap Nigerian output, although they stopped short of asking Libya to join the supply-cutting deal, and called on several members to boost compliance.

August’s biggest drop came from Libya, where output slipped to an average of 900,000 bpd as unrest forced the shutdown of the country’s largest oilfield, Sharara, plus other sites, putting a supply recovery on hold for now.

Top exporter Saudi Arabia trimmed supply because of lower exports, although this was offset by more crude use at home and exports rose in the latter part of the month. Saudi power plants burn more crude oil in the hot summer months for electricity to keep the population cool.

OPEC announced a production target of 32.50 million bpd last year, which was based on low figures for Libya and Nigeria. The target includes Indonesia, which has since left OPEC, and does not include Equatorial Guinea, the latest country to join OPEC.

Hopes not yet lost

Oil producers are still optimistic that oil prices will recover as there are fresh moves to extend the output cut beyond March 2018. Russia said it is likely to back a further extension of the OPEC agreement cutting oil output, judging that it has helped to stabilize the market, the country’s deputy prime minister said.

“The most likely outcome is that the deal will be extended,” Arkady Dvorkovich said, though he added that it is still too early to make a definitive decision. “We are still six months away, so we will see,” he said.

“Based on preliminary assessment, it is clear that the deal was efficient and contributed to the stabilization of the market,” Dvorkovich said. The Russia oil ministry is “fully involved” in monitoring compliance with the reductions, he added.

Russia’s energy minister Alexander Novak and his Iraqi counterpart Jabbar al-Luaibi met in Moscow to discuss cooperation within the framework of the OPEC and non-OPEC ministerial meeting, according to the Russian Energy Ministry.

FRANK UZUEGBUNAM