OPEC’s production agreement faces threat from sustained increase in crude oil prices
The continuous upward swing in the price of crude could prove to be the danger that would confront that may scatter the agreement on production cap reached in November 2017. As those bind by the agreement might want to the advantage of the increase in the price of crude oil to want to cut corners to make more revenue.
Analysts say with exception Nigeria which is still experiencing a very fragile production activities because of threat from militants a lot those countries that signed the crude oil production cap might play a fast one on the cartel with a renewed output cut agreement in place through the end of 2018 that brings Libya and Nigeria into the fold, OPEC enters the New Year brimming with confidence that its market rebalancing efforts will remain on track.
Natural field declines in several countries notably crisis ridden Venezuela and continued strong production discipline could likely be enough to keep the bloc’s output within the bounds of its ceiling under the deal.
The issuance of a combined 2.8 million b/d cap on formerly exempt members Libya and Nigeria at the organization’s November 30 meeting means that OPEC as a whole now has a notional collective ceiling of 32.74 million b/d, when all the members’ quotas are added up.
It has surpassed that level just once in all of 2017; this was July, when output averaged 32.82 million b/d in the month.
For sure, OPEC has defied critics by maintaining extremely robust conformity with its quotas to date.
From January-November, compliance was 108% according to S&P Global Platts, one of the six secondary sources used by the organisation to monitor output.
But with oil prices now 40% above mid-2017 levels, several analysts believe compliance could slip if some OPEC members are tempted to overproduce to capture more revenue.
“Compliance has been pretty good, but that’s when prices were lower,” Hedgeye analyst Joe McMonigle said. “Now, prices are higher so I definitely see some compliance challenges ahead.”
At any rate, production restraint from OPEC, along with the 10 non-OPEC producers led by Russia that agreed to join the curbs, is but one part of the market balancing equation.
Factors outside the bloc’s control will likely determine the success of its efforts to rebalance the oil market.
In particular, will US shale production, buoyed by rising oil prices in recent months, surge and undo the OPEC/non-OPEC cuts? And will global oil demand grow in 2018 as forecast, helping soak up any additional supplies that come onto the market?
On both counts, OPEC itself remains bullish. Its December oil market report forecast a major tightening of the market in 2018, with the so-called ‘call on OPEC crude,’ to average 33.15 million b/d for the year, far in excess of its current production.
The International Energy Agency, which represents major oil-consuming nations in the Organization for Economic Cooperation and Development, however, is far less optimistic.
It estimates that the world will need 32.5 million b/d of OPEC crude, some 650,000 b/d less than OPEC forecasts, to meet global demand.
Olusola Bello with agency report