What does an OPEC deal mean?
Gulf nations still must address how to limit oil output from its members
For at least two years, OPEC has engaged in a gruelling price war to claim market share and drive competitors from the market.
Low oil prices have inflicted deep pain on high-priced petroleum producers from Calgary to Caracas.
A surprise deal this week by the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, to rein in production signals a sharp reversal in strategy, a return to trying to manage an unruly oil market.
The news propelled oil prices up a further 78 cents to US$47.83 a barrel for West Texas Intermediate crude on Thursday.
In Canada, however, two years of turmoil have left much of the industry — and oil-dependent governments in Alberta, Saskatchewan and Newfoundland — wondering how real the truce is.
Few firms are willing to bet investors’ money yet on a tentative peace lasting.
“It’s a move in the right direction. In itself, I don’t think it’s enough,” says Kevin Neveu, chief executive at Precision Drilling Corp., the country’s largest oil and gas driller. “We need to see clear, fundamental supply-anddemand balance."
That view is far from unique and, after seeing oil prices sink from above US$100 a barrel in mid-2014 to below $27 last February, well understood.
“This is a signal that supply and demand fundamentals work, as clearly production at these price levels is not sustainable,” Steve Williams, chief executive of Suncor Energy Inc., said in a statement.
The challenges OPEC will confront trying to limit output were evident just minutes after the group agreed on the new plan.
In an angry and sometimes incoherent briefing, Iraq’s oil minister railed against the journalists and analysts who estimate the amount of crude each member produces.
Why? Those estimates will be key to setting quotas and evaluating which countries are meeting their commitments to cap production and which aren’t.
Iraq’s minister, Jabbar al-Luaibi, complained in Algiers that published estimates of Iraqi output were too low and warned Iraq will refuse to accept figures that don’t match its own.
While the agreement Wednesday imposed an overall production cap on the group of 14 oil producers, it didn’t assign individual limits — that was left to a committee that will report back at the Organization of Petroleum Exporting Countries’ next meeting in November.
Agreeing and monitoring those targets will be fraught.
“They still need to come up with those individual country quotas,” Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd. in London, said Thursday.
Cheating by member states that exceeded their quotas was a constant challenge for the group until it scrapped individual output limits in 2008. The group might have a hard time just agreeing on production baselines, as demonstrated by al-Luaibi’s protest at the news conference Wednesday in Algiers.
“I don’t think that what we have is a deal,” Jaafar Altaie, managing director at consultants Manaar Energy Group, said from Abu Dhabi.
“What we have is rhetoric alluding to a deal that gives breathing room for prices to rise and for OPEC to decide on the terms of its agreement and how to put it into place.”
European Brent crude and U.S. futures jumped more than five per cent Wednesday on speculation the deal will tighten the supplydemand balance.
West Texas Intermediate closed up 78 cents to US$47.83 Thursday as investors questioned the impact and likelihood of the OPEC deal being implemented.
Iraq’s al-Luaibi told reporters he disagreed with the production level OPEC attributed to his country. Iraq told OPEC it pumped 4.638 million barrels a day last month while data the group compiled from secondary sources put Iraqi output for August at 4.354 million barrels a day.
OPEC publishes the two sets of production figures each month in a report. “All these secondary sources which are used by international organizations should be corrected,” Falah Al-Amri, Iraq’s governor to OPEC, said. “This is a really very, very upsetting figure. So this is what made our minister upset today in the meeting because you use figures which aren’t acceptable.”
Iraq pumped 4.48 million barrels a day in August, according to data compiled by Bloomberg.
Iraq hasn’t had a quota since 1991 when OPEC gave the country the chance to recover from the first Gulf War. A proposal suggested Iraq will get a quota once again.
The are several other complexities. Since OPEC last set quotas for its members, four countries have either joined or re-joined OP EC—Angola,Ecuador, Indonesia and Gabon. Moreover, the agreement is expected to exempt Nigeria and Libya, where sabotage and war have cur bed output.