Pressures mount on OPEC to address Nigeria, Libya oil output

There is no doubt that the context within which Organisation of Petroleum Exporting Countries (OPEC) is operating has dramatically changed. Within OPEC, the output from some producers such as Nigeria and Libya has become more uncertain.

Though the meeting of the Joint Ministerial Monitoring Committee of the OPEC and non-OPEC countries, which ended in Vienna, Austria agreed to sustain the current production quota for Nigeria and Libya until it stabilises its crude oil production process, there are further pressures to bring the two oil producing countries under the oil output cut deal.

Bijan Namdar Zanganeh, Iran’s Oil Minister, insist the group needs to address rising output from Libya and Nigeria.

OPEC should focus on “the situation with Libya and Nigeria,” Zanganeh said, referring to the two countries exempted from capping production due to their internal strife.

Nigeria will be able to participate in cuts when its output stabilizes at 1.8 MMbopd, said Ibe Kachikwu, Minister of State for Petroleum Resources.

OPEC and other global producers including Russia agreed to maintain output cuts through March to end a price rout that has battered their economies since 2014. Iran was part of the deal reached last year, though it was given special permission to raise output by 90,000 bpd. Libya and Nigeria were not part of the deal and have since increased production, complicating the efforts of the suppliers to reduce the glut. Benchmark Brent crude has dropped by about half from its 2014 peak.

Nigeria’s production of 1.7 to 1.75 MMbopd has climbed from an all-time low of about 1 million barrels a day. Output will be “back in full swing” in five to six months, Kachikwu said.

Libya’s oil production has risen past 1million barrels per day. Output has been helped by an interim deal with Germany’s Wintershall to resume production amid a contract dispute.

Production from Libya’s Sharara field was returned to normal after a brief disruption when armed protesters broke into a control room in the coastal city of Zawiya, the National Oil Corporation (NOC) said. The field has been producing about 270,000 barrels a day (bpd), accounting for about a quarter of the country’s output, which climbed to more than 1 million bpd in late June from just over 200,000 bpd a year ago.

The market is currently showing strong signs of rebalancing, in part due to OPEC cuts, but also due to strong oil demand.

Most of the rebalancing has been reflected in the strengthening of the time spreads and differentials. It is only recently that price levels started catching up. What the market is concerned about the most is what happens after the expiry of the deal; whether this will be in March next year or later in 2018. There is a perception in the market that once the deal expires, producers will enter into another market-share war, flooding the market again.

There is no indication so far that Saudi Arabia is willing to abandon this current system, despite some market concerns about the effectiveness. Given that most of the growth is originating from Asia, Saudi Arabia will always make sure that their crude remains competitive there.

But, there is no doubt that competition has intensified as more exporters divert their crude to Asia. Therefore, all producers are exploring ways to market their oil more effectively. Also, the refining scene in Asia has become more sophisticated and refineries can source crude from any part in the world.

In the longer term, there is a belief that acquiring downstream assets can secure market for their crude, but the effectiveness of this strategy needs yet to be proven.

OPEC said in its September Oil Market Report that in 2017, world oil demand growth was revised higher by around 50,000 barrels per day. The upward revision is a result of better–than-expected performance from OECD (Organization for Economic Co-operation and Development) America and Europe in 2Q17, according to the report.

“Hence, world oil demand growth is now pegged at 1.42 million b/d, with total global consumption at 96.77 million b/d,” said the cartel.

World oil demand growth for 2018 was also revised up by around 70,000 b/d from the previous month’s report; it is now anticipated to be 1.35 million b/d, with total global consumption of around 98.12 million b/d.

FRANK UZUEGBUNAM