Supply cut: OPEC want non-OPEC producers on board

Some OPEC members are trying to bring major non-OPEC producers such as Russia on board in cutting supplies, as the Organization of the Petroleum Exporting Countries is unlikely to curb output alone when it meets on June 5 without the participation of non-OPEC countries. The jump in oil prices has been supported by stronger-than-expected demand growth and a slowdown in crude supply, and is likely to continue into the second half of this year, a senior Gulf OPEC delegate said.

A rally driven by Middle East tensions and signs the supply glut could ease pushed Brent crude to a 2015 high of $69.63 a barrel up from $45 in January. Oil prices more than halved last year after reaching $115 a barrel in June.

Last year’s oil-price collapse accelerated after OPEC refused to prop up prices. That shift in policy was driven by top exporter Saudi Arabia and supported by Gulf States. Since then, a drop in US drilling activity has raised expectations of a slowdown in supply growth. The Gulf delegate said lower supplies from producers within OPEC were also helping to support prices.

Core Gulf OPEC members are not wavering in their strategy to focus on market share rather than cutting output alone, suggesting big policy changes are unlikely at the June meeting unless non-OPEC producers change their stance.

“The hope for Libya coming back to the market is not there anymore. Expectations about a quick return of Iran is also not there and Iraq’s production is not as high as expected before.”

Lower prices might have stimulated demand and the global market needs at least an extra 4 million barrels a day for this year and next, of which 3 million bpd is to offset natural output decline and 1 million to meet demand growth, he said.

With prices rising, OPEC delegates said the group was set to maintain current production levels. The Gulf delegate said it was too early to say because of the effort to include others from outside OPEC in any output cut.

“There is an attempt to bring major non-OPEC producers to the table. But if they don’t cut, OPEC is unlikely to cut alone. It has to be a real and clear commitment and with numbers,” he said.

Iran crude may alter the dynamics

Energy Information Administration estimates that lifting oil sanctions could cause oil prices to decline by $5–$15 per barrel. It is a member of OPEC. Iran is OPEC’s fifth largest crude oil producer.

Iran’s oil ministry reported that the country could produce 3.8 million barrels per day within six months of lifting the oil sanctions. In April 2015, Iran produced 2.87 MMbpd. This means an output increase of 1 million barrels. It also means that Iran could become the second largest OPEC oil producer.

Lower oil prices and huge investments to scale up productions will be key factors that Iran will consider. Companies like Total SA (TOT), ENI (ENI), and British Petroleum (BP) are interested in making huge investments. US firms like Chevron and ConocoPhillips are also interested in developing energy assets in Iran.

During the late 1970s, Iran produced 6 MMbpd of crude oil. In April 2015, Iran produced 2.8 MMbpd and exported 1 MMbpd. If Iran produces 3.8 MMbpd, it could export 2 MMbpd. It could even produce more considering that it has one of the largest crude oil reserves.

Russia produced 10.71 MMbpd of crude oil in April 2015. Saudi Arabia and Iraq produced 10 MMbpd and 3.66 MMbpd, respectively, in April 2015. US weekly crude oil production was at 9.369 MMbpd for the week ending May 1—compared to 9.373 MMbpd for the week ending April 24. This added to the glut in Iran.

What will happen to the crude oil market? Surveys estimate that there is a surplus of 1.5 MMbpd considering demand. Apart from that, Nigerian and Angolan crude oil are available with no buyers in the market.

FRANK UZUEGBUNAM