As Opec prepares to meet in Algiers next week, the oil market is reminding the group’s members what’s at stake if they fail to reach a deal.
More than 800,000 bpd of additional crude is pouring into the global market this month compared with August as Russia pumps at an all-time high while Libya and Nigeria restore disrupted supplies, according to statements from their ministry officials. That would imply a tripling of the supply surplus, estimated currently at about 400,000 bpd by the International Energy Agency.
“We are overproducing and we’re not going to draw down inventories like we thought we would,” said Chris Bake, a senior executive at Vitol Group, the biggest independent crude trader. “We’re still building crude inventories and that’s a problem.”
The global oil oversupply will persist into 2017 as members of the Organisation of Petroleum Exporting Countries such as Saudi Arabia pump near record levels, others such as Iran and Iraq bolster capacity and production outside the group weathers the price slump, according to the IEA. Prices may struggle to hold above $40 a barrel unless Opec acts, Citigroup Inc predicts.
Crude is stuck at less than half the level it averaged at the start of the decade, straining the finances of producers around the world. Oil rallied last month on speculation Opec and Russia might revive a pact to cap production, though prices have since cooled.
Saudi Arabia told Iran it would be willing to reduce its output - which is close to a record 10.7mn bpd - if Iran were to agree to freeze at its current level of 3.6mn, according to two people familiar with the matter, who asked not to be identified because the talks were private. A second day of discussions between the two at the Opec headquarters in Vienna ended on Thursday without an agreement. Saudi Arabia anticipates the meeting in Algiers will be a chance to consult rather than make a decision on output levels, an Opec delegate familiar with the nation’s oil policies said.
While there has been a flurry of meetings between Opec officials from Vienna and Paris to Moscow in attempts to reach consensus, there’s still scepticism a deal will be possible. All but two of 23 analysts surveyed by Bloomberg last week predicted there won’t be an agreement in Algiers on September 28.
The volatility in supply created by the unexpected return of exports from Libya and Nigeria makes it harder to settle on any plan for stabilising the market, Ed Morse, New York-based head of commodities research at Citigroup, said by phone.
“There’s just too much oil in the market,” said Morse. “It’s very difficult to come to the conclusion that a freeze would be credible or doable when you’ve got the combination of what’s happening in Libya and Nigeria. It makes a shambles of any extrapolation of balances.”
Libya’s output has climbed to 390,000 bpd after a halt in fighting between rival armed factions, National Oil Corp chairman Mustafa Sanalla said on September 22. That’s 50% higher than the monthly average for August estimated by Bloomberg.
Nigeria has revived output to 1.75mn bpd following a cease-fire deal with militants in the Niger Delta region, Minister of State for Petroleum Resources Emmanuel Kachikwu said on September 19. That compares with 1.44mn last month, near the lowest in more than two decades, according to data compiled by Bloomberg.
Russia pushed output to a record 11.09mn bpd in September, Energy Ministry data show. While President Vladimir Putin said on September 2 that producers can overcome the tensions that have so far prevented an agreement, there are doubts over the practicalities of Russia’s involvement.
“No Russian contribution to a freeze is believable” as the government doesn’t have enough control over companies like Rosneft to prevent them from boosting supply, Citigroup’s Morse said.
Opec’s last attempt at a deal with Russia collapsed in April when Saudi Arabia insisted that Iran had to participate in a freeze. Iran refused as it was just starting to revive exports following the end of international sanctions.
Now that Iran has returned to pre-sanctions production capacity, “the odds are in favour” of some basic agreement, said Helima Croft, chief commodities strategist at RBC Capital Markets in New York. All producers may have a stronger incentive to cooperate as the global surplus lingers and low oil prices take a toll on their finances, according to Bassam Fattouh, director of the Oxford Institute for Energy Studies.
“If they do not freeze, they risk sending the price into the $30 to $40 a barrel range,” said David Hufton, chief executive officer of PVM Group in London.