OPEC agreement leaves more questions than answers

The Organization of Petroleum Exporting Countries (OPEC) decided to cut production for the first time since the global financial crisis in 2008. The informal meeting in Algiers yielded a deal to reduce output from its current production of 33.24 million barrels per day (bpd) to 32.5 million bpd in order to keep a lid on their oil production in a step designed to stabilize the worldwide price of crude. Despite the loose ends, OPEC has agreed to reset production at 32.5 million barrels per day (bpd) from August levels of 33.5 million bpd, essentially cutting production by 1 million bpd.

“The conference took into account current market conditions and immediate prospects and concluded that it is not advisable to ignore the potential risk that the present stock overhang may continue to weigh negatively well into the future, with a worsening impact on producers, consumers and the industry,” OPEC said in statement.

Furthermore, OPEC member countries decided to dialogue with non-member producing countries, with the aim to stabilize the market. Mohammed Bin Saleh Al-Sada, Qatar’s Minister of Energy & Industry and President of the OPEC Conference, said the market has changed since June, when the group last convened to discuss actions to stabilize commodity prices.

“It is evident that there is now a greater degree of urgency about ensuring the market returns to balance as quickly as possible,” he said.

Saudi Arabia led OPEC in November 2014 to defend market share, notably against U.S. shale oil producers, at the expense of high oil prices.

Deal, agreement; what’s the difference?

Energy market analysts are questioning whether it was a deal or an agreement especially as details, including production levels for each member country, will be worked out in OPEC’s November 30 meeting in Vienna. This has led some of the analysts to wonder what might potentially derail things between now and November.

Sources close to OPEC said Iraq almost blocked the agreement, objecting to the oil-production data the cartel is using to determine how much each country can produce. Jabbar al-Luaibi, Iraq’s oil minister, argued that Iraq was producing much more than OPEC was giving it credit for. The discrepancy, he said, would potentially limit Iraq’s production more than it should.

As OPEC was meeting in Algiers, Moscow announced that the country’s output smashed a post-Soviet record in September, reaching 11.1 million barrels a day. That’s up about 400,000 barrels from August.

Nigeria, Libya, Iran as special cases

Nigeria, Iran, and Libya are exempt from the limits. They are allowed to produce at “maximum” levels, and combined they are hoping to bring back 1.5 mb/d.

Libya and Nigeria would be treated as special cases as they have struggled under geopolitical unrest that has tamped down their production already. Iran would also take an exemption to increase output somewhat to keep the country close to its pre-sanction levels. Tehran has said it wants to produce 4 million barrels a day following the lifting of sanctions in January.

Khalid al-Falih, Saudi Energy Minister said that Nigeria, Libya and Iran may be allowed to pump “at maximum levels that make sense”.

Is Saudi desperate for a deal?

Saudi Arabia will suffer a fiscal deficit equal to 13.5 percent of gross domestic product this year, the International Monetary Fund estimates. Saudi Arabia faces a double-digit deficit this year. The IMF says the Saudis need oil close to $67 a barrel to square the books. When it comes to economic growth, Saudi Arabia is slowing sharply to 1 percent. Government contractors have gone unpaid, and the king announced unprecedented pay cuts for civil servants recently.

Also, the kingdom has the highest budget deficit among the world’s 20 biggest economies, it is enduring a delay in its first international bond issue and now faces fresh legal uncertainty as the US Congress recently voted to allow Americans to sue the country for its involvement in 9/11.

Saudi Arabia, according to Algerian Energy Minister Noureddine Boutarfa, told other OPEC members it is willing to reduce production to January levels. That effectively would mean a cut of 500,000 barrels a day. Few anticipated that Saudi Arabia would be seeking a deal to boost prices.

For the last two years, as oil prices plunged from more than $100 a barrel to a 12-year low of less than $30 a barrel in January, the Saudis have drawn on their huge currency reserves to cushion the impact. It spent $115 billion last year and between January and July this year it used up another $52 billion.

Russia sticks to $40 per barrel

Despite the initial rally by oil prices after the preliminary agreement by OPEC, Russia is sticking with an assumption that oil will average $40 per barrel in the next three years and will not take bait by revising its budget outlook, Anton Siluanov, the country’s Finance Minister said.

Although the world’s biggest energy exporter has signaled it is willing to join efforts with OPEC to control global supply, it is on course to pump oil at a post-Soviet record in September, adding as much as 400,000 bpd to the country’s output.

Russia is preparing its budget for the next three years. The Finance Ministry has proposed a fiscal gap of 3.2 percent of gross domestic product in 2017.

While keeping its fiscal policy tight, Russia has also been revisiting a mechanism suspended this year that capped spending based on a backward-looking average for oil. The so-called budget rule, which would prevent the government from spending surplus revenue above a pre-set oil price, aims to insulate the economy from the ups and downs in crude and shield the exchange rate by withdrawing all additional income into reserves.

FRANK UZUEGBUNAM