Internal discord among OPEC members and big oil-producing allies spilled into public view as the group came to grips with failure of its efforts to raise crude prices.
Until now, the Organization of the Petroleum Exporting Countries had largely blamed low prices on US shale drillers, who are at the heart of an American oil boom that has decimated the cartel’s power. Oil prices have actually fallen since OPEC’s 14 members and 10 other big producers struck a deal in December to withhold 2 per cent of global oil supply, in part because American producers ramped up output.
OPEC officials said they were now looking inward and contemplating a crackdown on members that aren’t keeping their promises to limit output. OPEC production rose again in July to over 33 million barrels a day, a Petro-Logistics report said last week, near the group’s record levels of 2016.
OPEC officials expressed frustration with a new truth of the oil market: The cartel no longer has much power to lift prices, but it can certainly send prices lower with too much production. Iraq, the United Arab Emirates and others haven’t cut as much as promised.
“We are not doing this to allow other countries to free ride and undercut the agreement by overproducing,” said Khalid al-Falih, the Saudi Arabian energy minister, in unusually blunt remarks following a meeting with national representatives from oil-producing countries in St Petersburg.
Mr Falih said Saudi Arabia, the world’s top oil exporter, announced it would go further than cutting its production and would also limit its exports at 6.6 million barrels a day in August. He said he wanted other countries to follow suit, noting troubling figures that showed some were still exporting huge amounts of oil even as they say they are cutting output.
OPEC secured a production commitment from Nigeria, a cartel member exempted from last year’s deal among OPEC and 10 non-OPEC producers, to withhold nearly 2 per cent of global oil supply from the market.
“We are aiming to bring those who are slacking to full conformity,” said Russian Energy Minister Alexander Novak in an interview. Russia isn’t an OPEC member, but its commitment to limit output was crucial to securing an OPEC deal last fall.
Crude prices rose modestly after the meeting. US crude futures were up 1.25 per cent, to $US46.34 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose 1.12 per cent to $US48.60 a barrel on ICE Futures Europe.
The announcements came after a frenzy of meetings in St Petersburg over the weekend and a meeting of big producers at the Four Seasons Hotel. It highlighted how worried OPEC members have become about the futility of their efforts so far.
“This is a collective effort,” Mr Falih said after the meeting, saying he had held a teleconference with absent countries that haven’t been cutting to “forcefully demand participation and the same level of commitment … We are not going to just sit back and watch.”
Mr Falih is under pressure to keep the OPEC deal from falling apart and raise prices, The Wall Street Journal has reported. The Saudi kingdom is preparing to publicly list its state oil company in 2018, and its valuation will depend in part on oil prices.
Mr Falih has become increasingly concerned about the deal as prices kept falling in recent weeks and bad news kept rolling in, according to people familiar with the matter. He said Saudi Arabia could support extending the production deal beyond its expiration in March 2018. It culminated last week with tanker-tracking firm Petro-Logistics reporting OPEC output rose above 33 million barrels a day this month, up 145,000 barrels a day from a month ago.
Even if the overnight news gives oil prices a lasting lift, OPEC still has to worry about US shale producers taking advantage and throttling up their output. That is what happened after last year’s OPEC deal, and the flood of new oil from the US is one reason oil prices remain depressed.
Giovanni Staunovo, commodity analyst at Swiss bank UBS, said the production deal has “a 20-30 per cent probability of a breakdown.
“Should this happen, countries bound by the deal would likely immediately ramp up production back to pre-deal levels, the oil market would move from a deficit into oversupply, and prices may plunge heavily, “ Mr Staunovo said.
A new Saudi cut to its exports could have a real effect on the balance of supply and demand, said Bjarne Schieldrop, a commodity analyst with Nordic bank SEB. The kingdom exported an average of 7.2 million barrels a day from January to May, he said, so the new action would theoretically remove an additional 600,000 barrels a day from the market.
But Saudi Arabia generally reduces exports in the summer anyway when it faces rising domestic demand for crude oil to be burned to create electricity for airconditioning.
The limit on Nigeria is less likely to have immediate market effects.
Nigeria has agreed to limit its production to 1.8 million barrels a day, OPEC officials said. The African country produced about 1.6 million barrels a day in June, giving it substantial room to keep increasing.
Another OPEC member exempted from last year’s deal, Libya, has a target of 1.25 million barrels a day, still higher than its June production of 820,000 million barrels a day.
Beyond Libya and Nigeria, Iraq, OPEC’s second-biggest producer, and the United Arab Emirates have been pumping more than their agreed-upon limits.
“We’ve had very serious discussions with those countries that are not performing as well as others,” Mr Falih said, saying there were unspecified “mechanisms in place to bring those countries in line.”
Analysts have warned any new production cuts from OPEC would likely just help American shale producers. First, it would cede market share to the US from OPEC. Second, any price rally would likely be quickly killed by new shale production.
Mr Falih’s focus on exports was new. He pointed to discrepancies between countries’ production and export figures, calling the difference “a matter of concern.”
For example, OPEC’s production fell by 920,000 barrels a day from October to June, according to the International Energy Agency. But its exports were only 120,000 barrels a day lower in June compared with October, according to Kpler, a ship-tracking firm.
So even with OPEC cutting production, it was still sending roughly the same amount of oil into the global market in June as it was in October, the month used as the baseline level for the production deal.
“Exports have become the key metric for financial markets, and we need to find a way to reconcile credible export data with production data,” Mr. Falih said.
“We need to continue monitoring” the implementation of the cuts, said Mr Novak, Russia’s energy minister.
With Nathan Hodge and Benoit Faucon