OPEC meeting result: oil production from OPEC member countries is to increase until the over-compliance with 2016’s agreed cuts has been eliminated
The anticipated 174th Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) concluded in Vienna today with an announcement that with the oil market in apparent balance, OPEC’s goal is to return production to 100% of the Nov. 2016 agreement level.
OPEC said that the oil market situation has improved during the past six months and that the global economy is strong. They statement described oil demand as “relatively robust, albeit with some uncertainties,” and it said the market rebalancing is evidently continuing.
The announcement recalled the 171st OPEC Conference resolution reached on 30 November 2016 for a production adjustment of 1.2 MMBOPD and noted that “OPEC member countries have exceeded the required level of conformity that had reached 152% in May 2018.”
“Accordingly, the Conference hereby decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100%, as of 1 July 2018 for the remaining duration of the resolution.”
Production additions may not reach the level pledged
Today’s announced agreement allows significant leeway for producers, however, with minimal hard commitments. Statements by oil ministers in the wake of the meeting did not show a consensus either. The Saudi energy minister announced a nominal increase of 1 MMBOPD, but many other ministers said the actual increase implemented will be lower, from 600 MBOPD to 700 MBOPD.
OPEC members intend to grow production roughly proportional to their current output, thus preserving market share. This means countries with significant idled capacity, like Saudi Arabia, will not be adding back all 1 MMBOPD, but instead will only pledge a part of the overall increase.
Unfortunately, some OPEC members are likely not able to add production at all, and will not contribute to the output increase.
JCCM meeting on June 21 in Vienna. Russian Minister of Energy Alexander Novak is seated far left.
For example, if the production increase is implemented to preserve market cap, Bloomberg estimates Venezuela will need to add 52.4 MBOPD. However, the country is in the midst of widespread financial collapse, and is almost certainly unable to sustain an increase of this magnitude. Indeed, recent trends would suggest the opposite: Venezuelan production has fallen by an average of 51 MBOPD each month this year. Ending this slide would be difficult enough, much less adding production for any sustained period.
Many other members of the group are operating roughly at capacity currently, according to the IEA. Angola, Libya, Algeria, Gabon, Qatar and Equatorial Guinea each lack sufficient spare capacity to quickly add meaningful volumes of oil.
Iran may be able to add production, but impending U.S. sanctions would likely constrain the country’s ability to find buyers.
U.S. shale question was great, answer was a dud
During the press conference, CNBC asked Suhail Mohamed Al Mazrouei, UAE Minister of Energy and Industry (currently serving as president of the OPEC Conference): “When you made the decision two years ago to make the initial cut, the U.S. was producing far less. How much has ten and a half million barrels a day from the U.S. and our shale boom factored in to this decision today, sir?”
Al Mazrouei responded,”We always take into account all the contributors to the market; we don’t make our decisions in a vacuum.”
A Bloomberg News reporter asked about the actual number discussed in the meeting being 600,000 barrels.
Al Mazrouei responded, “The decision is to target 100%; we did not mention a number, you can do the math.” He said that the report from the JMMC recognizes that “there is a difference between the 100% and where we are today. … It’s a little bit less than a million barrels, to be accurate, but there is that number. We did not target a number, we targeted to do our best in targeting a conformity of 100% to the 1.2 million barrels.”
Al Mazrouei said that achieving the production target would need to be shared with the non-OPEC member group. He acknowledged that though all the OPEC member countries were in agreement, some wouldn’t have the capacity to add to production, “and I don’t think OPEC can force any country to do something. It is to be done voluntarily,” he said.
A reporter asked the question if some countries were unable to increase production to reach the collective goal, would others with available production capacity take on that commitment?
“Do we have an allocation [by country] to share with you today? I would say no. How are we going to ensure that we are not going to exceed 100%? I can assure you that we are talking to each other… we will never exceed that number; I think it’s challenging enough for the group to achieve the 100%. … We’re not expecting any negative surprises when it comes to the conformance levels,” Al Mazrouei said.
Suhail Mohamed Al Mazrouei, UAE Minister of Energy and Industry (currently serving as president of the OPEC Conference)
‘Long-cycle projects are the baseload of future supply’
In his opening remarks at the meeting, Al Mazrouei said that OPEC’s focus “is on making sure that the market is both well-supplied and balanced. This also includes looking beyond the short-term, with a specific focus on investments.”
“So far in 2018, the pace of investment has gradually picked up, but we are still not seeing enough robust investment in long-cycle projects. These are the baseload of future supply, the foundation of this industry’s future, and will be vital to long-term global economic expansion.
Al Mazrouei said the required global oil sector investment in OPEC’s World Oil Outlook is estimated to be $10.5 trillion, with oil demand set to surpass 111 million barrels a day by 2040. “Every effort should be made to avoid a potential supply gap that could present a future serious challenge,” he said.
Congo admitted as new OPEC member today
Also in today’s meeting, OPEC announced the immediate approval of Congo as a new OPEC member.
At its regular meeting June 22, 2018, OPEC voted in Congo as a member.
In a 2017 report by the U.S. government’s export office, the agency ranked the Republic of Congo as the fourth largest oil producing country in sub-Saharan Africa saying the country was expected to produce 260,000 barrels per day by the end of the last quarter of 2017.
Oil accounts for over 90% of Congolese exports, according to the report.
By 2018, production is expected to grow to 350,000 barrels per day as new offshore fields come on line. Despite new finds and better drilling technology, oil production is still expected to decline to 275,000 barrels per day by 2020 as older oil fields are retired.
The Republic of Congo has one oil refinery in the coastal city of Pointe-Noire, which fulfills about 65% of the country’s domestic needs.
OPEC noted that “a more comprehensive and forward-looking set of metrics is recommended to enhance the analytical depth and understanding of the complex global oil demand and supply dynamics beyond the short-term.”
The next OPEC and non-OPEC ministerial meeting will take place tomorrow. The next ordinary meeting for OPEC is set for December 3, 2018.
WTI streaks toward $70
Traders liked the result from today’s OPEC meeting. West Texas Intermediate crude oil contracts soared during the day, clocking an uptick in excess of $3.60 and a day high of $69.25 at one time. Brent reached a high of $75.67 in the day’s trading.
Oil streaks toward $70 per barrel.
