Pressure mounting on OPEC to broker deal
ENERGY
CALGARY • Pressure is mounting on OPEC members to reach an agreement in Vienna next month, as a failure to meet its targets would undermine its credibility and likely send oil prices into a tailspin, analysts say.
As output from the Organization of the Petroleum Exporting Countries continues to rise, the “costs of failure and the impact on pricing will likely only increase, adding more pressure on the group to succeed,” analysts with Citi Bank said in a recent research note.
The cartel tentatively agreed to cut output to between 32.5 million barrels per day and 33 million bpd during a meeting in Algeria last month. According to the most recent data from the Paris- based International Energy Agency, OPEC production is still rising and averaged 33.75 million bpd in September.
Steadily rising OPEC production, distrust between member states and a long history of missed product i on quotas have raised doubts over whether the cartel can actually meet its stated targets.
And as oil prices rise in anticipation of a future cut, a failure to meet its production threshold would likely roil markets and send prices tumbling.
“They get the message that they can’t let this thing fall apart,” said Seth Kleinman, the head of European energy research at Citigroup.
Citi analysts put t he likelihood of a “rhetorical” OPEC agreement, including Russia, at above 50 per cent. The analysts say a recent rise in tanker loadings in Middle Eastern ports suggest the market also anticipates an agreement, as buyers secure cheaper crude in anticipation of rising prices.
But while analysts think an OPEC agreement is increasingly likely, the likelihood that the cartel will meet i ts targets i s much lower.
“I expect they’ l l come up with something, some agreement,” Kleinman said. “Whether or not it will have any follow- through, whether it will be acted upon, is a totally different question.”
OPEC r epresentatives have attempted to put forward a uniform message ahead of talks in Vienna, but have offered very little detail around who will cut and by how much.
Nonetheless, oil prices surged last month following the tentative agreement. Prices for benchmark crude West Texas Intermediate closed September at over US$ 48 per barrel, a roughly US$ 5 rise from the month’s lows. On Monday, reports that Russia would also partake in a modest cut again sent prices upward, lifting WTI above US$ 50 for the first time in nearly three months.
Russia is “significantly driving the market” since it tentatively agreed to a cut, said Jamie Webster, a senior director at the Boston Consulting Group’s Center for Energy Impact. However, the country is not likely to play a major role in any cut, he said.
Unlike some OPEC members, Russia has several oil producing companies operating in its fields, which would complicate efforts to curb production. Some of the oilfields in Russia, he said, are susceptible to reservoir damage if they are shut in.
“How do y ou decide which field is going to go down?” Webster said.
For analysts, the larger question is whether an OPEC deal would actually have a significant impact on oil markets.
Recent data from the IEA suggests oil markets should balance by mid-2017 with or without an OPEC cut, which would have only a shortterm impact.
In a research note, Montreal- based Desjardins Group said an agreement “s hould have little i mpact on oil prices over the medium term, especially as these countries have frequently flouted their commitments in the past.”
Falling production outside of the Middle East and northern Africa are likely to have a larger impact on prices.
Global oil production from non- OPEC fell in the first half of 2016, which has gradually brought markets toward a supply- demand balance.
Despite early signs of renewed vitality from U. S. shale producers, overall oil production in the country continues to decline. Oil production in North Dakota recently fell below the one million bpd marker for the first time in over two years.
THEY GET THE MESSAGE THAT THEY CAN’T LET THIS THING FALL APART.