OPEC’s resolve tested as extension of output cuts weighed

OPEC impressed oil traders this year by making almost all the supply cuts it promised. Keeping output down will only get harder.

The Organization of the Petroleum Exporting Countries and its partners are expected to extend output curbs into early 2018 when they meet next week, in an ongoing bid to clear a global surplus. Yet the tail winds that made cutting supply easier in the first half of the year — including temporary oil-field maintenance and a seasonal lull in demand — will be gone just as new obstacles are emerging.

To keep a lid on output this summer, Saudi Arabia will need to sacrifice an even bigger share of exports as consumption at home rises. Iraq yearns to expand capacity and has already used the maintenance option to keep oil fields idle. Meanwhile, Nigeria and Libya, two OPEC nations exempt from the deal, are restoring lost output.

The parties in the deal are “going to struggle,” said Michael Barry, director of research at consultants FGE in London. “This deal has been remarkable in its implementation. As time goes on, discipline is likely to erode. Almost every country wants their production to go up.”

Brent crude, the global benchmark, gained 56 cents, or 1.1 percent, on Wednesday to close at $52.21 per barrel in London.

As the world’s fuel-storage tanks remain brimming and as prices languish, OPEC and its allies have conceded that the initial plan for six months of production cuts wasn’t long enough. Yet Saudi Arabia and Russia’s proposal that their 24-nation coalition, due to meet in Vienna on May 25, should extend the measures

● for another nine months may prove an unbearable strain, analysts said.

“Production curbs for the first quarter of 2017 were comparatively easy to agree to,” said David Fyfe, chief economist at Geneva-based oil trader Gunvor Group. “They’ll likely agree to extend” the deal, but “the risk is higher they’ll leak extra barrels onto the market.”

On this deal, OPEC showed an unprecedented level of commitment, implementing 96 percent of the cuts it promised for the first four months of the year, according to the International Energy Agency.

Some are optimistic that

OPEC and its partners will maintain their resolve. Mike Wittner, head of oil market research at Societe Generale in New York, said the stakes are high enough that the organization will stick to its commitments, and that as inventories decline, producers will feel encouraged to stay the course.

“They’re going to hold the line,” Wittner said. “If we see stock draws happening soon, which we believe will be the case, those signs of success will bolster their determination. When you see light at the end of the tunnel, it’s easier to keep it together.”

Still, strong compliance was often attributable to Saudi Arabia cutting more than was required, compensating for laggards like Iraq and the United

Arab Emirates.

If the kingdom continues to restrain output, it needs to make another sacrifice. The Saudis typically boost production during the summer to maintain exports while meeting increased domestic demand from air conditioning. Keeping a cap on output would mean foregoing some exports and the revenue they provide.

Iraq, which still hasn’t made its full cut, plans to boost production capacity to 5 million barrels a day, an increase of about 6 percent, Oil Minister Jabbar al-Luaibi said May 11. This won’t conflict with its commitment to freeze output, he said.

“We have question marks around Iraq,” said Harry Tchilinguirian, head of commodity

markets strategy at BNP Paribas in London. “They have been reluctant since the very beginning and were slow to implement their cuts. Most of the supply restraint in Iraq has come with the help of field maintenance.”

Maintenance in Iraq, Kuwait and the UAE may have accounted for about 500,000 barrels a day of the output halted — almost half the group’s total cut, according to FGE. For Iraq, this enabled the country to avoid compensating foreign companies for unscheduled production shutdowns.

“Several countries basically used maintenance as a way of keeping production down, but what they did was pull it forward from later in the year,” said FGE’s Barry. “Now maintenance

is over, the question is what do they do? More maintenance, or cut at other fields? The pressure is on.”

OPEC also faces a challenge from the recovery of two members exempted from the deal because of production losses. Both Libya and Nigeria are showing progress in tackling the political crises that slashed their output.

Libya is producing at the highest level in more than two years after restarting its largest oil field, according to state-run National Oil Corp., while Nigeria has fixed a pipeline after a one-year halt, which could boost its output by about 13 percent.

The 11 nonmembers joining OPEC’s effort have only implemented about two-thirds

of their promised reduction, according to the International Energy Agency, and they also face problems in sustaining their curbs. Cuts in Russia came alongside the traditional seasonal stagnation in activity, and prolonging them would thwart plans by companies to expand output.

“It was easy to mask maintenance in the first half as voluntary cuts, but quite impossible to do it any further,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, Germany. “There will be lower discipline within OPEC and lower discipline from nonOPEC.”