Opec, Russia to stand pat on oil deal even as glut persists
london — Opec and Russia’s plan to clear the global oil glut hasn’t worked as they hoped, but there’s little expectation the world’s largest producers will act more aggressively when they meet this weekend.
Oil has slumped into a bear market and inventories remain stubbornly high despite a deal between Opec and 10 countries outside the group to cut output. The implementation of supply curbs is faltering as Libya and Nigeria restore lost production.
The trouble for ministers meeting in St Petersburg to review the progress of the deal is the alternatives look little better than the status quo. If the Organisation of Petroleum Exporting Countries abandons the deal and increases oil output, a further plunge in prices would inflict more pain on their economies. And while deepening the production cuts would spark a rally, that might encourage even bigger flows from US shale drillers.
“They’re between a rock and a hard place,” said Mike Wittner, head of oil market research at Societe Generale in New York. “The bottom line is, it hasn’t worked” and “if they cut more, the more they support prices, the more they support US production.”
Oil prices have given up all their gains since Opec and Russia assembled a coalition of producers in December to try and end the market’s two-and-a-half-year slump. Despite forecasts that the measures would reduce the world’s bloated oil inventories, that doesn’t seem to be happening, the International Energy Agency said on July 13.
The agreement between Opec and its allies was undermined before it even started, as key producers such as Saudi Arabia, Russia and Iraq ramped up exports just before the deadline to cut output took effect. The pact faces a further challenge as Nigeria and Libya, which were exempt from cuts while they tackled political crises, recover output.
“The underlying problem is Libya and Nigeria combining to produce significantly more than anyone anticipated they would,” said Ed Morse, head of commodities research at Citigroup in New York.
While both nations have been invited to the St Petersburg gathering, neither would be willing to reduce supplies even if they were asked, Morse said. Moreover, as both producers are near the limits of their capacity, any agreement to cap at current levels would merely be symbolic, he said.
Weakening compliance among other nations poses another challenge. Implementation by Iraq — which says it shouldn’t have been asked to cut while suffering so much economic hardship and battling militants — has fallen to a low of 29 per cent, according to the Paris-based IEA. Ecuador’s Oil Minister Carlos Perez said on Monday that his country was pulling out of the deal, before diluting those comments the following day.