Opec’s token cut will raise oil prices, and help Russia

With Vladimir Putin signalling willingness to freeze output, the complex horse-trading session at the oil producers’ meeting on Wednesday is likely to bring about the desired result.

If US president-elect Donald Trump disrupts world trade with increased tariffs, all bets are off on global oil demand. Carlo Allegri / Reuters

The November 30 Opec meeting faces great challenges in its plan to lower production and stabilise prices above $50 per barrel.

The Saudi oil minister, Khalid Al Falih, has signalled the kingdom's willingness to limit output, in a volte-face from the market-share priority that drove oil from $115 per barrel in 2014 to a low of $27 early this year.

The producers’ organisation agreed in principle to lower collective output from the current 33.7 million bpd to the 32.5 to 33 million bpd region at an extraordinary meeting of Opec in Algiers at the end of September. The aim is to underpin prices and start to mop up the large oil inventories that have accumulated over the past two years. Earlier meetings with non-Opec producers raised hopes that Russia and others would add to the cuts, collectively boosting oil revenues at the cost of relatively small output reductions.

Because Vladimir Putin, the Russian president, is signalling willingness to freeze output, this could actually end up translating to a token cut to buttress an Opec agreement to boost both prices and the dire situation of the Russian economy.

All Opec members also seek relief from huge budget deficits, but agreeing on any allocation of the agreed collective cuts is going to be extremely difficult. Iran, Iraq, Nigeria and Libya all want to be exempt because of exceptional circumstances ranging from war with ISIL, UN sanctions lifted and sharply reduced output because of internal political strife. Despite lower payments to oil companies, Iraq has increased its production to 4.6 million bpd, while neighbouring Iran wants no limit until it has reached pre-sanctions output levels of 4.2 million bpd.

Nigeria increased output by more than 200,000 bpd last month and, if Muhammadu Buhari, the president, is able to do a deal with Nigerian National Petroleum Corporation workers and disruptive Niger Delta dissidents, he might be able to raise production next year above 1.5 million bpd towards the 2005 peak of 2.65 million bpd.

Libya reserves the right to get back to the 1.6 million bpd under Colonel Gaddafi, and success against ISIL plus better accord among the three governments permitted Mustafa Sanallah, the Libyan National Oil Corporation’s (NOC) chairman, to more than double the 260,000 bpd August average to 600,000 bpd recently. The NOC aspires to average 1.1 million bpd next year.

The major Opec producers and Russia might be willing to exempt Iraq, Libya and Nigeria due to their special circumstances. Iran might also be willing to limit its crude production, now that it is reaching physical constraints. After all, recent big rises in exports have centred on condensates from expanding natural gas production and these light oils are exempted from Opec quotas. In the past, Opec has had most success in boosting prices when Iran and Saudi Arabia have reached agreement. It might happen this week in Vienna because many informal discussions ahead of the talks have been aimed at precooking a deal. Russia and Saudi Arabia now seem willing to sacrifice minor cuts for stable prices.

Iran and Iraq have delayed any commitment to quotas until the ministerial session on November 30. One of the issues is that both countries maintain their current output is higher than Opec secretariat estimates. It may be possible for the conference to hammer out a set of individual production figures if the inflated figures of Iran and Iraq (and possibly others) are simply accepted.

It will be an 11th hour agreement because the process is essentially a complex horse-trading session that depends on how much key players like Saudi Arabia and Iran want an accord that ends the laissez-faire situation. Analysts seem to be betting that there will be an agreement, yet it could all fall apart if there is too little compromise. Saudi Arabia is putting pressure on Opec by insisting it will not bargain with non-Opec producers until the organisation itself comes up with a cuts agreement.

With total Opec output at about 33.7 million bpd, there would need to be contributions from most of the 14 members if the production target enunciated in Algiers is to be achieved. Of course they could be helped by unexpected supply disruptions in 2017 and the slow grinding down of existing capacity world wide, with recent record low drilling and further decline in industry expenditure.

Nonetheless, both the Opec secretariat and the International Energy Agency are predicting that new capacity will more than offset other declines in non-Opec output next year. So the decline this year in non-Opec production is forecast to be reversed to a small gain next year.

A new wild card will be US energy policy under Donald Trump, when he becomes president. If he chooses to protect domestic energy producers on national security grounds, there will be a shrinking international pie to share. Furthermore if Mr Trump disrupts world trade with sharply increased tariffs to “make America great again”, all bets are off on global oil demand.

The November Monthly Oil Market Report of the Opec secretariat says demand for Opec crude will be 32.7 million bpd in 2017 on “business as usual” assumptions. If Opec succeeds, an agreement might reduce supply to align with forecast demand for next year. But this would not draw down at all world inventories, which have risen by 700 million barrels since the mid-2014 Saudi “market share” initiative. This rise would necessitate a drawdown of nearly two years at 2 million bpd to restore total inventories to more normal levels. Clearly only a major supply disruption could do this. Mr Trump might try to reimpose sanctions on Iran but the UN and other countries are unlikely to accede to US demands while Tehran is living up to its side of the agreement.​

The US president-elect has actually spoken of “renegotiating” the sanctions-lifting deal but given his commitment to American petroleum interests, this might bizarrely take the form of getting American companies back into Iran, with new long-term supply implications.

Honouring any short-term limits becomes more challenging in the shadow of looming new sources of supply or falling rates of demand growth. So even if Opec achieves an accord at its meeting in Vienna, any stability might be very short-lived with an unpredictable Trump administration assuming office at a time when world growth will be tempered by higher interest rates.

Jim Crawford is the managing director of Sharjah-based Inter Emirates General Trading Company.

Follow The National's Business section on Twitter