Nigeria, Libya to cap as OPEC extends deal

As expected, OPEC agreed to extend its production cut deal through to the end of 2018 bringing relief to an oil market that had grown jittery in recent days. The initial reaction from oil prices was muted, but once fears of a selloff had passed, both WTI and Brent moved dramatically upwards thereafter.

Saudi Arabia reasserted its leadership of the oil market after brokering its desired extension of output cuts with OPEC and non-OPEC partners through to the end of 2018. The deal, agreed after nearly nine hours of negotiations in Vienna, kept its new ally Russia onside and prevented a sell-off that many analysts had feared.

Brent crude futures settled up 46 cents or 0.7 percent to $63.57 a barrel. US crude futures settled up 10 cents or 0.2 percent to $57.40 a barrel. Brent rose 3.5 percent on the month, with US crude rising 5.5 percent. The Brent/WTI spread widened by 49 cents.

With the extension, the deal will now run from January through to December 2018, and the exact volumes of the production cuts will be the same as this year. The OPEC/non-OPEC coalition said that they would monitor market conditions and would respond if the fundamentals deviate significantly from expectations.

Nigeria, Libya set to cap

One notable change is that Libya and Nigeria agreed to cap their production levels at their 2017 average, which does not necessarily curtail supply. Nigeria and Libya were issued a combined 2.8 million barrel per day output cap.

“Nigeria and Libya accepted not to produce more than their production in 2017 for all of 2018. We didn’t set a figure for Libya and Nigeria but both are less than 2.8 million b/d,” Iranian oil minister Bijan Zanganeh told reporters.

OPEC granted Libya and Nigeria their exemptions when the production cut agreement with 10 non-OPEC countries was negotiated late last year, as the two African nations dealt with internal strife and civil unrest that had targeted their oil infrastructure. However, both countries have seen sharp rises in production this year, partially undoing the impact of the OPEC/non-OPEC coalition’s collective 1.8 million b/d in supply reductions.

Ibe Kachikwu, Nigeria’s minister of state for petroleum told reporters before the meeting that the country’s current crude oil production was 1.70 million to 1.75 million b/d and would not hit 1.8 million b/d until January at the earliest adding that Nigeria would support an output cap for itself at 1.8 million b/d and would continue to be responsible with its production, as it has since the deal first came into effect from January this year.

“Nigeria will always support any moves to help solidify OPEC, especially given the gains we are having,” Kachikwu said.

Kachikwu said that Nigeria will seek to boost its condensate production next year, instead of crude, describing the strategy as part of its commitment “to be disciplined” with OPEC’s efforts to rebalance the market. Condensates are not subject to the OPEC deal.

Nigeria is currently producing a total of 2.05 million-2.10 million b/d, with crude oil accounting for 1.70 million-1.75 million b/d and condensates production at “around 350,000 b/d.”

Libyan output rebounded to 980,000 b/d in October, a rise of 70,000 b/d from the previous month as production from key fields like Sharara ramped up.

Exit strategy still a puzzle

For Russia, reassurance about how the curbs will eventually be wound down seems to be as important as the duration of the extension. It needs greater clarity than most OPEC members because its economic policy making is more complex, including a floating exchange rate that fluctuates with the oil price.

Saudi Oil Minister Khalid Al-Falih said it is premature to talk about an exit strategy because OPEC and its allies are relying on oil demand in the third quarter of 2018 to finally eliminate the inventory surplus.

However, there feelers that the oil cartel and its allies are quietly started working on an exit strategy in an effort to reassure investors it would not flood the market once the curbs finally expire. Without a gradual exit, OPEC and its allies could return almost overnight 1.8 million barrels a day of production, roughly equivalent to the demand of France. The work highlights how oil supply and demand remain finely balanced.

Despite signs the market is recovering, traders still worry about a return of the pump-at-will policy that triggered the 2014 price collapse.

FRANK UZUEGBUNAM