Will Saudis’ OPEC gambit backfire?
By handing lifeline to rivals, cartel’s kingpin risks undermining success
The famously fractious OPEC members seem to be getting along just fine these days.
Kingpin Saudi Arabia has deftly manoeuvred to bring recalcitrant members and even OPEC “frenemy” Russia on the same page to lay the groundwork for a deal in Vienna on Nov. 30.
But after failing to win the market share war for the past two years, Saudi Arabia may be painting itself into a corner once again with its new strategy of setting OPEC quotas between 32.5 million and 33 million barrels per day from its current level of 33.24 million bpd.
The deal will likely allow Saudi Arabia’s rivals to raise production even as it handcuffs itself to quotas that were discussed in a meeting in Algiers last month.
U.S. shale producers are already taking advantage of the bump in crude oil prices since the Algiers agreement and are actively lock- ing in prices above US$50 per U.S. crude barrel, said Michael Tran, director of global energy at RBC Capital Markets in New York.
“That provides a lifeline to the shale producers,” said Tran, who says he has seen a ramp-up in U.S. shale producers hedging output at prices higher than they have been all year.
“If OPEC can’t come up with an agreement and prices go back to US$40-45 a barrel, U.S. producers become simply price-agnostic because they are so much more hedged. (The Saudis) have to make the quota work because if they don’t, U.S. production will grow even in a low price environment.”
Jon Morrison, Calgary-based CIBC Capital Markets executive director of institutional equity research, said while Canadian producers are slower to hedge, he agrees that U.S. producers are being granted a “November lifeline.”
“The Saudis have to come out with a deal or lose out big time,” Morrison said.
The Saudis also have to worry about Libya, Iran and Nigeria, which are exempt from the quota, which “could undermine the entire notion of a cut” that may be orchestrated in Vienna, Citibank analyst Seth M Kleinman said in a recent report.
“If Nigeria and Libya together add one million bpd to OPEC production, or even just 0.5-m bpd by yearend, then substantive cuts will be required by other OPEC countries, and this is where things will likely get very difficult,” said Kleinman, who is based in New York.
War-torn Libya’s oil production has reportedly surged to its highest level in more than a year at 551,000 bpd, as key exports resumed from the eastern ports of Ras Lanuf, Marsa-el-Hariga and Zueitina. Libyan output stood at 1.6 million bpd before the fall of dictator Moammar Gadhafi in 2011. The Libyan National Oil Company, which aims to raise output to 900,000 by the end of the year, is negotiating with local groups to restart the major oilfields of El Sharara and El Feel, with total capacity to produce 450,000 bpd, according to the International Energy Agency.
However, with as many as three governments in play in the beleaguered country and the terrorist group ISIL lurking in the shadows, Libya remains vulnerable to more turmoil. Barclays Capital believes Libyan production could rise significantly, but notes the challenge to sustain production “lies in the reality that various actors now control the oil supply chain in the country, from fields, pumping stations, pipelines, to the ports.”
Nigeria has struck a fragile ceasefire agreement with rebels who had been targeting its oil infrastructure. But Royal Dutch Shell Plc. has reportedly restarted exports from its 200,000-bpd Forcados crude pipeline, which was shut for eight months. Exxon Mobil Plc. also commenced operation of its 330,000 bpd Qua Iboe field, which was shut since July.
Nigeria has also reportedly started selling all its crude blends at a discount in an effort to regain its share of the global market.
Meanwhile, Iran has emerged as the fastest source of OPEC supply this year, with production already rising 760,000 bpd by September to reach 3.67 million bpd, and aims to reach four million bpd by the end of the year. Iran is also securing deals with international oil companies and aims to start a new pipeline and terminal to export as much as 300,000 bpd of a new grade of crude by the end of the year.
Despite the challenges, CIBC believes oil prices could push past US$60 per barrel in 2017.