OPEC could add to oil glut

Producers eye freeze, but deal on cap could be in name only

The world’s largest oilproducing nations gather in Qatar on Sunday with the goal of capping crude production to stabilize low prices that have slashed their revenues and crippled scores of Houston energy companies.

But if the proposed freeze of production is adopted, it may only dump more oil on the already oversaturated market. Recent data submitted to the OPEC Secretariat suggests the cartel’s members are inflating their output levels to set a production ceiling that would allow them to sell additional barrels in global markets — and further add to the glut.

Earlier this week, the six biggest OPEC nations reported they pumped a combined 26.6 million barrels a day in March, about 1.2 million more than outside sources could verify. That inflation is about the size of the daily production of the Eagle Ford Shale in South Texas, the secondmost prolific source of U.S. shale oil.

“You can’t believe what they say,” said Chris Ross, a University of Houston finance professor who helped advise OPEC members on production quotas and other issues in the 1970s. “It was true from the get-go in the 1970s.”

The fortunes of Houston’s energy industry and economy depend greatly on whether OPEC and its rivals can agree on — and stick to — an output ceiling at the meeting in Doha, the capital of Qatar. As U.S. shale oil has flooded the market and other producers have kept pumping, oil prices have crashed, plunging more than 60 percent from the recent peak in mid-2014.

Some 30 Texas energy companies have filed for bankruptcy, including two Houston firms this week, Energy XXI and Goodrich Petroleum, which filed Friday. The Texas Workforce Commission reported Friday that Houston’s mining and logging sector, which is dominated by oil and gas companies, shed nearly 60,000 jobs over the past year.

The oil market has hoped for months that Saudi Arabia and other OPEC nations would agree to cap production. A production freeze could be the first step by the cartel and its rivals to try to bring prices back their under control.

If they do, analysts say, crude prices could rise to as much as $50 a barrel as investors become more confident the global crude oversupply will shrink this year. At $50 oil, U.S. producers could consider spending more on drilling and pumping oil.

But if the market isn’t satisfied with the deal, the recent oil rally that has lifted crude prices above $40 a barrel from a recent low of $26 a barrel could sputter. Investors in recent days have been skeptical of a production cap. U.S. crude prices fell Friday to $40.36 a barrel in New York, down $1.14.

Resisting cutbacks

Analysts say OPEC’s inflation of its output numbers means than any freeze would be one in name only. Iraq has inflated its production figures the most in advance of the Doha meeting, analysts said, claiming it pumped 4.55 million barrels a day in March, a figure that is 354,000 barrels or 8 percent higher than the latest numbers recorded by independent sources.

Iraq and many other producers have resisted cutting production because they need revenues to support government operations and social programs. Iraq, for example, needs the money to support its war against the radical Islamic State that has seized Iraqi territory.

OPEC’s six biggest nations — Saudi Arabia, Iraq, Iran, Kuwait, the United Arab Emirates and Venezuela — have exaggerated production numbers at a much higher rate as the meeting in Doha approaches. The amount they inflated the figures in March was more than three times larger than in November, before OPEC members began discussing a production freeze with Russia.

“In effect, it means a lot of this is a public-relations, window-dressing exercise to reassure the market there isn’t going to be unthrottled OPEC production increases,” said Ann-Louise Hittle, the head of oilmarket analysis at energy research firm Wood Mackenzie in Houston.

Wood Mackenzie projects OPEC production will increase by 500,000 barrels a day this year even if the group agrees to a production target, with much of the increase coming from Iran and Iraq.

Russia, the second-largest oil producer after Saudi Arabia, also appears to be exaggerating its production numbers ahead of the Doha meeting. Russia reported a post-Soviet record of 10.9 million barrels a day in January, though Wood Mackenzie estimates its output in the months before January was well below that.

“Russia is playing the same game,” Hittle said.

Iran sitting out

Another factor that makes it unlikely a production cap will have much effect is Iran, which recently was liberated from the West’s oil-export sanctions. In desperate need of oil revenues to rebuild its economy, Iran has said it won’t join the international production freeze as it has increased crude exports by 600,000 barrels a day since December, the month before the United States and five other western powers lifted sanctions against the Islamic Republic, according to market research firm Genscape.

Iran’s return to the oil market has, to some degree, interfered with the oil-market correction Saudi Arabia had hoped for, said Morgan Downey, a commodities trader and author of “Oil 101.”

Iran is selling three times as much crude to India than before the sanctions were lifted, and has reportedly agreed to sell India an additional 400,000 barrels of crude a day starting in April. In terms of exports, Iran has “outperformed what the market expected,” said Amir Bornaee, an analyst at Genscape who tracks oil vessels coming out of Iran.

Another reason traders are skeptical of a production freeze is OPEC’s long history of ignoring quotas. Large oil-producing nations for years have pumped more crude than the group’s self-imposed ceiling, which was finally abandoned at an OPEC meeting in December.

Russia has a similar history. In the late 1990’s Russia said it would ease production to help lift prices after a steep drop in oil demand, but actually increased output.

“Their track record is not very good. Why should we believe it now?” said Eric Rosenfeldt, who oversees sales, trading, supply and marketing at petroleum supplier PAPCO. For crude prices rise and stay higher, “the market is going to want to see real production come down in a material way.”

If OPEC and other producers fail to curb output, the lower prices likely will lead to further production cuts by U.S. oil drillers, many headquartered in Houston. The U.S. Energy Department said this week the nation’s output has fallen to 8.9 million barrels a day from about 9.6 million barrels a day in April, and it projects production will continue to drop this year to an average 8.6 million barrels a day.

Smaller U.S. oil producers “are definitely under pressure,” said Mark Sadeghian, an analyst at Fitch Ratings. “A lot of independent producers have cut their drilling programs down to bare bones.”