Oil prices may force early review of supply cap deal

Oil prices tumbled from a high of $70 per barrel two weeks ago, falling below $60 a barrel last week Friday, the first time this year, and its worst performance in recent weeks, raising concern that OPEC and non-members may review their supply cap deal which saw about 1.8million barrels per day (bpd) excised from global output.

US and Brent crude futures have slid more than 11 percent from this year’s peak in late January. Brent fell nearly 9 percent for the week while US crude dropped 10 percent, the steepest weekly declines since January 2016.

US West Texas Intermediate (WTI) crude settled down $1.95, or 3.2 percent, to $59.20, the lowest settlement since December 22. The session low for US crude was $58.07. Brent futures fell $2.02 a barrel, or 3.1 percent, to $62.79 a barrel, its lowest settlement since December 13.

The slump below $60 on Friday was on account of record US oil production raising inventories. US crude producers pumped out an average 9.3 million barrels a day in 2017 and will average 10.6 million this year, according to a US Energy Information Administration report last week.

Time was when the US was a fringe player in the global oil market, now when it coughs, oil markets catch cold. Alexander Dyukov, Gazprom Neft chief executive said on Friday that an adjustment of the global oil production cut deal between OPEC and some non-OPEC members, including Russia, was possible in the second quarter of 2018 according to a Reuters report.

Dyukov also said that the global oil market was close to the balancing point and hoped that the countries would rather agree to increase production, not to cut more. Russia has cut its oil production by over 300,000 barrels per day under the deal.

Rebalancing of the oil market is good news for producers, especially those whose economies relies heavily on oil income. Libya’s oil production averaged more than 1 million bpd in January, the first time since July 2013, according to data provider Genscape, an oil industry intelligence group.

In January, Libya pumped 1.083 million bpd of crude oil, and 1.133 million of total liquids. Analysts at Genscape further said that the African country’s oil production monitoring showed that oil fields in the country appeared to operate relatively consistently in January, without steep, significant dips below the average production levels due to weather or pipeline attacks.

This indicates that the country may be turning the corner from many years of civil strife which constrained more than 600,000 bpd from the country’s production before the 2011 uprising which toppled its leader. Libya’s normal production was 1.6 million bpd.

After the main fields and oil export terminals in Libya re-opened in 2017, production started to increase, and together with Nigeria’s recovering oil production and US shale resurgence, was offsetting part of the OPEC cuts and depressed oil prices for much of 2017. Libya’s production topped 1 million bpd in July 2017, but the country has struggled to maintain that level consistently for a month

Nigeria too is keen to raise badly needed revenue to pay cash call debt arrears with its joint venture partners and complete infrastructure projects. The country is keen to pump more and cannot wait to exit the supply cap.

The monthly survey of S&P Global Platts, one of OPEC’s secondary sources, showed this week that Libya’s oil production averaged 980,000 bpd in January, flat compared to December. Libya and Nigeria together exceeded their combined 2.8-million-bpd cap under the OPEC deal, according to a survey by Oil price.

The implication of this scenario is that OPEC and its non-members in the pact to impose cuts on production may review the agreement earlier than they had anticipated. The decision from the last meeting in January was to keep cuts till 2018 but the mood of the market may force an early review.

ISAAC ANYAOGU