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Oil production cut and ‘opexit’ threats

By Sonny Atumah

As the Organisation of Petroleum Exporting Countries, OPEC holds the 171st Ordinary meeting in its Vienna, Austria headquarters on 30th November 2016;it may be producers’ reprieve from the lingering production freeze discourses. The battle for production cap and market share has been fierce in the last thirty months triggered by the U.S. shale oil technology. Saudi Arabia’s response in a price war led to crude oil glut and price collapse in July 2014.

The tussles led to fissures within and among oil blocs including, world leading conventional oil producer, Saudi Arabia and shale leading producer, the United States on the one hand; disagreements between Gulf neighbours Saudi Arabia and Iran; and geopolitical rivalry between Russia and Saudi Arabia. It had indeed been a flurry of who controls production and market share that resulted in the present global instability. The wrangles have gone beyond oil production cut or freeze to political and military rivalry, in the proxy wars in Syria and Yemen by United States, Russia, Saudi Arabia and Iran.

The first salvo in the multi-faceted crises was fired by the American drillers whose shale outpaced global oil supply from January 2011 to June 2014 to make America the number one oil producer. Between June 2014 and September 2015, Middle East producers’ in retaliatory moves, increased production and market share to dwarf the Americans dream of becoming a price giver. The price war had kept the American deployed shale rigs vulnerable with total drilling rigs reduced and operating in abysmally low gears.

It cannot be understood the tick-tack-toe game that kept the United States and Saudi Arabia as allies in crude oil supply. Again the Americans have been fingered in the frosty relations between  Saudi Arabia and Russia which some accused the United States for stoking the fire to grind down the Russian economy that relies greatly on petroleum. The situation resonated in producers within and outside OPEC being at daggers drawn for the soul of petroleum that the centre no longer holds.

The 2014 summer oil price slump by over 60 percent kept the 56-year old cartel and the petroleum world in quandary. Internecine feud had been within OPEC between high cost producers whose economies are devastated by low crude oil price and prosperous producers some of who had oil deals with perceived foes. It is predicted that if gladiators in the petrodollar business fail to strike a deal especially in next week’s OPEC meeting, threats for possible OPEC Exit, otherwise known as ‘Opexit’ loom.

Various attempts have been made by OPEC members to bring sanity in the roller coaster petroleum business. Bringing volatiles under control have been met with utter chaos; two major producers Saudi Arabia and Iran standing on market shares control in the 168th December 2015 Vienna meet was a deadlock. The Saudi’s conditionality was that unless co-leading producer and oil convenient soul mate, Russia was in the production cut deal OPEC should count them out. Their action drove crude price to a 13-year low of $27 per barrel in January 2016.

Again there was another disagreement between Saudi Arabia and Iran when 18 OPEC and non-OPEC producers,that contribute three quarters of total world production gathered in the Qatari capital of Doha on April 17 2016 to stabilize output. The Saudis insisted on a deal only if Iran was involved in the talks. Iran was absent but had a solemn undertaking on market stability only when she achieves pre-nuclear sanctions of over 3 million barrels per day level of crude oil production.

OPEC’s Vienna meeting of June 2, 2016 achieved little, with the possibility of solution dangled again before Algeria where similar hassle was puzzled out in the city of Oran in 2008. The Algiers September 2016 15th International Energy Forum, IEF Ministerial meeting ending with OPEC’s sideline extra ordinary meeting was the nearest to reality in the pursuit for oil price stability.

Since then high level diplomatic moves have taken place with Gulf Cooperation Council, GCC members, Iranian, Russian and Americans urged to embrace talks on oil freeze or cut. OPEC Secretary-General, Nigeria’s Mohammed Barkindo in shuttles from Algiers through Doha in the Gas Exporters Cooperation Forum, GECF last week to Vienna next week to shore up support for the Algiers agreement;.  Although some observers felt Barkindo’s moves have not achieved much, it is a matter of conjecture judging from the fact that members that never believed a freeze was impossible a year ago are now opting for compliance agreements.

In October a technical committee chaired by Algeria was set up on details of the Algiers agreement.  Latin American founding member, Venezuela through its vocal oil freeze defender, President Nicolas Maduro after a meeting with Barkindo, allegedly issued a threat that OPEC was ready to enforce members’ compliance agreements reached, but what is not clear is how recalcitrant members would be whipped in.

The Algiers agreement may have put Nigeria, Iran and Libya in the exempted club list not because of price crash but for loss of market share. Nigeria has been battling militancy in its Niger Delta region while Iran is trying to regain pre-nuclear sanctions market share while Libya is battling rebellion. Iraq which is one of the declining states has also requested to be in the exemption list since it is fighting the Islamic State, IS.

But de facto OPEC leader Saudi Arabia has it turned down threatening to opt out of production cut if granted. Saudi Arabia may not be contemplating to bear the brunt of total production cuts given the weight exerted by low oil prices on its economy. Saudi Arabia recently announced a cut in projects worth US$266 billion.

The Saudi’s expect Iraq to cut production like other OPEC producers and sharing cuts equitably. Experts believe OPEC producers deserve to be on the same page to achieve the oil freeze agreement. If members abide by firm quotas and a tight control mechanism a 1million barrels per day swing the price of crude in the WTI would rally in the high fifties well above break-even points for most members, otherwise crude price would drop below the forties.Predictions are that producers in OPEC led by Saudi Arabia may opt for a 1million cut which production cost may be profitable below US$60. The U.S. shale producers require at least US$60 production cost to be in business.

OPEC countries devastated fiscally with low crude oil prices including Venezuela, Nigeria, Angola, Algeria and Ecuador have been descending through clefts in the cliffs. There is a consensus in the global petroleum circle that it was time for production cuts to raise the price of barrel above the US$50 mark. Observers believe that this may be the last chance for OPEC to stamp its authority as its relevance hangs in the balance.

 


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