OPEC no-cut strategy called to question
After showing some of the strongest gains, Brent fell back after fresh data from the Energy Information Administration (EIA) showed a 10.9 million barrel increase to crude inventories for the week ending on April 3. That leaves crude storage at the highest level in over 80 years. The inventory build was dramatically higher than expected and crude prices crashed by nearly 7 percent.
Saudi Arabia also announced that it was producing oil at a much higher rate than the markets expected. Now pumping at a record 10.3 million barrels per day, Saudi Arabia has decided to keep the pressure up on shale producers and will continue to fight for market share.
Still, despite the bearish news for oil prices, US production is flattening out as rigs continue to decline. While oil prices will remain volatile, it will probably remain within a $45-$55 range for WTI, and a $50-$60 range for Brent, at least for the next few weeks calling into question OPEC’s no-cut strategy.
Oil prices have halved from the $115-a-barrel level hit last June, in a drop that deepened after OPEC refused to cut output, choosing instead to defend market share. Top exporter Saudi Arabia was the driving force behind the policy shift.
Iran says strategy not working
OPEC’s strategy of holding output steady is not working and the group’s members should discuss production levels before its next meeting in June, Bijan Zanganeh, Iran’s oil minister said.
However, Bijan Zanganeh said it was up to other members of the OPEC to make way for any extra Iranian crude that reaches world markets if Western sanctions on Tehran are lifted.
“It seems (OPEC’s strategy of not cutting output) does not work well, because prices are coming down,” Zanganeh said during a visit to Beijing. “We haven’t witnessed stable situations on the market.”
Iran was among the OPEC members that wanted an output cut at OPEC’s last meeting, in November. But the Gulf OPEC members, who account for more than half of the group’s output, refused to cut without the participation of non-OPEC producers.
OPEC, which pumps one third of the world’s oil, may soon have to deal with an increase in supply from Iran if Western sanctions over its nuclear programme are lifted.
The group will be able to “coordinate itself” to accommodate Iran’s return without causing a price crash, said Zanganeh, who was making his first visit to Beijing since taking on his current role two years ago.
But so far there is no sign of any willingness of other OPEC members to cut supply. Days after the announcement of Iran’s framework nuclear deal with world powers, Saudi Arabia said it had increased production.
Iran, once OPEC’s second-largest producer after Saudi Arabia, hopes to boost exports by as much as 1 million barrels per day (bpd) in just two months if there is a final agreement with world powers on its nuclear programme and sanctions are lifted.
The Iranian minister arrived in Beijing just a week after Tehran and the world powers reached the framework nuclear deal to discuss oil sales and Chinese investments in Iran.
Higher sales to China, Iran’s biggest oil client and trade partner, would likely be on the cards with an end to sanctions. Iran also hopes to resolve differences with Chinese energy companies on oil and gas projects in the Islamic republic, so that production can be ramped up again quickly.
Iran’s oil exports have been cut to around 1.1 million bpd from at least 2.2 million bpd before 2012 and the loss of oil income has made it difficult to invest and pay for the equipment and services needed to keep its production operating smoothly.
Libya urges OPEC to cut by 800,000 bpd
OPEC should change course and cut oil supply by 800,000 barrels per day (bpd) or more to prevent an expected return of Iranian exports from weighing on prices, Samir Kamal, Libya’s OPEC governor said.
“OPEC members, as a unit, need to re-evaluate their strategies,” Samir Kamal, Libya’s OPEC governor and head of planning at the North African country’s oil ministry said.
They “need to reach an agreement to bring down the production levels by at least 800,000 barrels a day, especially now that an agreement has been reached with Iran which is expected to increase its production”, he said.
A framework deal announced last week to curb Iran’s nuclear work could eventually allow Tehran to boost oil exports, which have been cut by almost half since 2012 due to Western sanctions.
Four years after the ousting of leader Muammar Gaddafi, Libya is struggling with two rival governments. Kamal represents Libya on OPEC’s board of governors, a body that influences but does not decide OPEC policy.
When the producer group last met in November, Libya was among member countries calling for a cut in production.
OPEC meets again on June 5 to set policy. Although they did not oppose the group’s no-cut decision of last year, other non-Gulf OPEC members such as Venezuela and Iran have expressed misgivings about it and sought supply reductions.
A group of 18 African oil producers, many of which are not OPEC members, is lobbying for output curbs to boost prices that it says have fallen to levels that threaten to spark social unrest.
But without support from Saudi Arabia and the other Gulf OPEC members, a rethink is unlikely. Saudi Arabia has increased production to a record high and Kuwait has said OPEC will not change policy at the June meeting.
Saudi Arabia ready to help improve oil prices
Saudi Arabia’s oil minister Ali al-Naimi said that the kingdom stood ready to “improve” prices but only if other producers outside of OPEC joined the effort.
Naimi said Saudi Arabia had pumped around 10.3 million barrels per day (bpd) in March, marking an increase from previous months. He did not say why output had risen. Naimi also said he expected oil prices that have languished near six-year lows to improve in the near future.
Oil prices extended gains as traders took Naimi’s comments as sign he may be open to renewed talks with producers like Russia and Mexico over curbing production in order to revive prices.
“The kingdom is still ready to help bring back stability to the market and improve prices in a reasonable and suitable manner, but with the participation of the main producing and exporting countries and based on clear principles and high transparency, so the kingdom or the Gulf countries or OPEC countries do not shoulder that alone,” he said at a Saudi economics conference.
Naimi has taken a more open stance toward collaborating with big oil exporters outside of OPEC in recent months, as oil prices fell much further than some members of the oil producer group had expected.
Naimi also reiterated that Saudi Arabia was not competing with US shale oil, and took the chance to talk about the kingdom’s own development of its shale natural gas resources.
Saudi expects to begin producing some 20 million to 50 million cubic feet per day of shale gas next year, rising to 500 million cfd by 2018, he said. The kingdom’s has 300 trillion cubic feet of extractable natural gas reserves, he added.
FRANK UZUEGBUNAM