OPEC crunch talks: Energy world awaits outcome with apprehension
As members of the Organization of Petroleum Exporting Countries (OPEC) gather in Vienna for the much anticipated November 30 deliberation on the crude oil production cut, the energy world awaits the outcome with apprehension.
OPEC is expected to discuss production cuts of 4 – 4.5 percent at the ministerial meeting. Such a cut would bring OPEC’s current output down by more than 1.2 million bpd, according to calculations based on the group’s October production.
Most analysts expect some form of cut, but it is uncertain whether it will be enough to prop up a market dogged by oversupply since 2014. Without an OPEC deal, the International Energy Agency predicted that 2017 will be the fourth consecutive year in which supply runs ahead of demand, potentially causing lower prices.
Technical experts from member countries met in Vienna to finalize the details of the cuts. After two days of meetings, the talks concluded without resolving the issue of Iran and Iraq, instead deferring the matter to ministerial talks.
Last minute build up to the meeting saw US crude fall nearly 4 percent, dragged down by the uncertainty over whether the oil cartel will reach an output deal, after Saudi Arabia said it will not attend talks with non-OPEC producers to discuss supply cuts.
Brent crude futures settled at $47.24 a barrel, down $1.76 or 3.59 percent. US crude futures settled down $1.90 a barrel at $46.06, a 3.96 percent decline. Prices continued to decline in post-settlement trading, dropping as low as $45.88 a barrel.
In late September, OPEC agreed the outline of its first production curbs since the global financial crisis in 2008. Since then, the group has spent two months trying to agree how to share the cuts, which would bring its production to a range of 32.5 MMbopd to 33 MMbopd. OPEC estimates that it pumped 33.6 MMbopd last month.
Saudi stance sinks non-OPEC talks
OPEC’s de-facto leader, Saudi Arabia pulled out of planned talks with non-OPEC nations including Russia as disagreements about how to share the burden of supply cuts stood in the way of a deal to boost prices just days before a make-or-break meeting in Vienna.
OPEC officials were scheduled to meet with non-members including Russia before the ministerial meeting in Vienna. The meeting was later canceled entirely after the Saudis decided not to take part.
Saudi Arabia said it wants an OPEC deal in place before conversations with other producers such as Russia, sources said.
Saudi Arabia is ready to cut production, but only if all members share the burden of cuts equitably and transparently. In practice, that means the kingdom thinks Iraq needs to cut output and Iran has to freeze production around current levels.
Iraq had sought an exemption from joining any production cuts, arguing that its fight against Islamic State justifies special treatment. Iran has insisted it will not accept any limits on its production until it has returned to the pre-sanctions level above 4 MMbopd.
OPEC wants big cuts from non-OPEC producers
OPEC may ask oil producers outside the cartel to make big cuts in output, Azerbaijan said highlighting the challenges in striking a deal as the two sides enter the final stages of talks aimed at cutting production to stabilize prices.
Natig Aliyev, Azerbaijan oil minister, which is not a member of OPEC, was quoted as saying the cartel may want non-OPEC producers to cut output by as much as 880,000 barrels per day (bpd), a figure which analysts said could help wipe out excess crude supplies and start to eat into record inventories.
However, the energy minister of Russia, the largest non-OPEC producer, said he had not heard about such a proposal, and that OPEC’s earlier suggestion had been for members outside the cartel to reduce output by 500,000 bpd.
OPEC has long insisted it wants non-OPEC producers to properly participate in global output cuts to support prices, citing tensions at the start of the millennium when Russia promised to join cuts but raised output instead.
A cut of 880,000 bpd would represent less than 2 percent of current total non-OPEC output. But given few non-OPEC producers are expected to participate in the cuts, the burden could be heavy on those that do so – potentially Russia, Kazakhstan, Azerbaijan and Mexico, all of which rely heavily on oil revenues.
Should OPEC and non-OPEC members reach a deal to cut 1 million bpd and 880,000 bpd in production respectively, it would immediately help the market turn into a supply deficit and help erode record stocks amounting to over 3 billion barrels.
Oil tanker watchers plot cuts of their own
While OPEC measures would help prop up oil prices, they could also remove enough output to fill five supertankers a week, just as a ballooning fleet of the vessels is starting to drag on freight rates.
The industry’s biggest ships, the very large crude carriers, are currently predicted to earn $31,000 a day in 2017, according to 13 analyst forecasts. While that is not bad by historic standards, the estimated rate is more than 15 percent lower than anticipated in August. Benchmark earnings averaged about $40,000 a day so far this year, compared with about $68,000 a day in 2015.
Shares of tanker companies so far stayed immune from the prospect of cuts by the OPEC. Demand for their ships normally rises in the fourth quarter as oil refineries increase the amount of crude they process.
“The cut will have a big impact on the shipping market,” said Magnus Fyhr, a managing director at Seaport Global Securities LLC. “The rates could be cut by $5,000 to $10,000 from the current forecast levels as it will remove demand.”
“A decision to cut output will mean higher oil prices, lower demand and trade and bad business for tankers,” said Per Mansson, a shipbroker at Affinity Shipping LLP in London.
VLCC rates reached a seven-year high of $114,148 a day in December after OPEC embarked on a campaign of pumping as much oil as it could, sending crude prices tumbling while boosting shipments. The tanker market is now bracing for the reversal of that policy.
FRANK UZUEGBUNAM