Against the backdrop of recent assertions by the secretary-general of OPEC, Mohammad Barkindo, that the crude oil production freeze agreement reached last December had been hugely successful in rebalancing the oil market, the cartel says it may undertake deeper measures, including extension of the freeze agreement, to sustain stability in global oil prices. Chineme Okafor writes
At the Third Iraq Energy Forum in Baghdad, recently, Secretary-general of Organisation of Petroleum Exporting Countries, Mohammad Barkindo, stated that crude stockpiles were starting to decline in what he thought was a sign that the production cuts agreed last December by OPEC and non-OPEC members, but implemented this year, were bringing the market to balance.
Barkindo said at the forum that the decision of the cartel and its allies led by the Russian Federation to freeze production levels was not just helping the market rebalance but also bringing back confidence and investments in the global oil industry.
Notwithstanding that OPEC and some non-member producers curbed output levels to rebalance the market, reports indicated that an overhang of an estimated 282 million barrels of oil in storage had so far been a drag on crude prices. But Barkindo maintained that the market outlook for the group and its allies was good.
Good Prospects
Inferring that the development, though nettlesome to an extent, was a lot different from what it was like a couple of months back, he noted that the confidence of the group was buoyed by a comparison of the current 282 mb stock overhang with 380 mb that was recorded at the end of July 2016.
“I remain cautiously optimistic that the market is already rebalancing,” said Barkindo at the Baghdad forum.
He explained, “We have started seeing stock levels coming down. Following these historic decisions taken last year we believe we are already seeing more favourable industry conditions.”
The OPEC general secretary lauded the organisation’s commitment to the oil market rebalancing, saying, “In this regard, I think it is also important to recognise just how far we have come since we fully embarked on the process of rebalancing the market and returning stability on a sustainable basis.
“For example, at the end of July 2016, WTI (West Texas Intermediate) and Brent combined net-long positions were at a level of 350,000 contracts, which then increased to 500,000 contracts on November 29, just before OPEC took its landmark decision, and then to 921,000 contracts on February 21 this year.
“Despite a sell-off in the second week of March, the number of net-long positions remains healthy, at around 662,000 contracts.
“The market is also showing further signs of realigning, with the OECD stock overhang currently at 282 million barrels above the five-year average. This compares to a level of 380 million barrels at the end of July 2016.
“We are also seeing an uptick in energy investments in 2017, when talk was only of retrenchment and investment cuts in the first half of 2016. And equity markets today are buoyant. Confidence is returning to the sector. We need to ensure that this positive sentiment is maintained.”
Freeze Extension
As reported by Bloomberg, Brent for May settlement, which expired on Friday, slipped 38 cents to trade at $52.58 per barrel on the Europe exchange, climbing back above the $50/b mark following speculations that OPEC could extend the production freeze to curb glut.
Already, five members of OPEC and Oman have reportedly backed the cartel to extend the production cuts beyond June, which is the original cut-off date for the output freeze agreement. While Saudi Arabia and Kuwait have also insisted that oil stockpiles would need to fall to the five-year average, optimism over extended cuts had also wavered amid a surge in US supply. However, comments from Kuwait’s oil minister, Issam Almarzooq, reiterating support for an extended deal, had bolstered confidence in members’ commitment to down swollen stockpiles ahead of their next formal ministerial meeting on May 25 in Vienna.
Of those in support of the extension, Kuwait, Iraq, Venezuela, Angola and Algeria, are seen to be in the forefront, and a meeting in Kuwait City over the weekend to discuss compliance with the pledged reductions could afford the group the opportunity to discuss further their commitments to the agreement and its potential extension.
Barkindo stated in his address at the forum in Baghdad that the supply curbs were gradually restoring the market to balance, saying the decision should be further assessed with a long-term perspective on its implications for the market and producers.
“It is also important to highlight that these recent decisions should not only be viewed as a short-term necessity. We need to view these actions as vital to long-term oil market stability and the necessary investments required for the world’s energy future,” he stated.
Similarly, after a US government report showed refineries in the country boosted crude use to highest levels in almost three years while fuel supplies fell, to give oil prices its biggest weekly increase in 2017, global financial services firm, Morgan Stanley, stated in a report that “less visible” crude stockpiles in countries, including China, Japan and floating storage around the world, had declined by 72mb this year.
Additionally, Amrita Sen, who is the chief oil analyst at Energy Aspects Limited, was quoted as telling Bloomberg, “OPEC is fully aware that running down the crude overhang will take more than six months, so a rollover of the deal is still the most likely outcome.”
Reports also indicated that Iraq, which initially sought an exemption from OPEC’s output cut, achieved a 98 per cent compliance with the agreement in March, after its production data was revised by its oil minister, Jabbar Al-Luaibi, and Director General of Iraq’s State Oil Marketing Organisation (SOMO), Falah Al-amri, told reporters in Baghdad that Iraq’s production was 4.46mbpd for March.
Notwithstanding, OPEC said Iraq agreed to cut production by 210,000bpd to 4.351mbpd, and Barkindo reiterated he had been assured they will comply fully.
Nigeria’s Position
As one of the three OPEC members that were exempted from the production freeze deal because of their declined production levels, it seems Nigeria may not be exempted a second time from the deal even though her oil production levels have hardly appreciated.
While there are no new violence-related production disruptions in the country’s oil fields, Nigeria has yet to raise its production figures to the 2.2mbpd it planned for in its 2016 budget. At best, it has so far reached 2mbpd, but as recently disclosed by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, this dropped to 1.7mbpd following scheduled maintenance works by Shell and ExxonMobil.
Confirming the position of the country in February, Barkindo told reporters when he visited Kachikwu in Abuja that at the expiration of the freeze agreement after six months, Nigeria might not get a renewal of the exemption even if its production levels remained low. He emphasised that as agreed by parties to the agreement, the country’s exemption from the production freeze would last for only six months.
Barkindo also maintained that OPEC was confident the market would absorb the extra volumes of oil that would come from Nigeria’s increased output.
According to him, “This decision is for six months and as the country continues to be exempted for these months, we will continue to pray that they will recover production and return to the market fully because the market needs every barrel that Nigeria can produce or Libya or Iran.
“The demand figures continue to show a robust growth of over one million barrels per day going forward.”
