Why Opec is staring down the barrel of a double cut
london — The Opec is going to have to do much more than simply extend its current production deal when it meets this week if it’s serious about addressing surplus inventory. In fact, its own figures show it needs to double the cut it made in January. That means finding another 1.2 million barrels a day to take out of production.
In its latest forecast, published last week, the producer group trimmed its estimate of the need for Opec crude this year by 300,000 barrels a day. At that level of production — 31.92 million barrels a day — inventories will remain static, assuming demand and nonOpec supply forecasts are correct.
The Opec produced 31.74 million barrels a day in April, according to secondary-source estimates published by the group. Simply rolling that level forward for another six months will exhaust the excess at an average rate of 722,000 barrels a day in the second half and will see about 120 million barrels removed from inventories in the nine months begun at the end of March. That may seem like a lot, but the Opec puts the excess at the end of the first quarter at 276 million barrels — and that’s just in the developed countries of the OECD.
Merely extending the cuts won’t bring oil inventories anywhere close to their five-year average level by the end of December. And let’s set aside the fact that the five-year average has been inflated by two years of surplus, which means stockpiles will have to come down significantly below that to return to normal levels.
Implementation of the agreement so far has been better than expected, but that does more to highlight the deal’s weakness than anything else. Ensuring compliance in the second half will probably prove much harder. Several key producers have achieved their targets by simply bringing forward maintenance at oil fields and refineries. Extending the cuts will require real sacrifices, like shuttering production and reducing exports.
There’s a risk even that won’t be sufficient. North American output is booming, and there are signs of recovery in Libya and Nigeria. The US Department of Energy recently published a new forecast that revised the country’s oil output up yet again. Crude oil production is now expected to rise by 960,000 barrels a day between December 2016 and December 2017.
That compares with a 210,00 barrel a day increase it foresaw just before the Opec’s November gathering. Add in a 470,000 bpd ramp up in the production of natural gas liquids, and the Opec’s entire cut is more than offset. — Bloomberg