As OPEC prepares to meet in Algiers next week, the oil market is reminding the group’s members what’s at stake if they fail to reach a deal.
More than 800,000 barrels a day of additional crude is pouring into the global market this month compared with August as Russia pumps at an all-time high while Libya and Nigeria restore disrupted supplies, according to statements from their ministry officials. That would imply a tripling of the supply surplus, estimated currently at about 400,000 barrels a day by the International Energy Agency.
“We are overproducing and we’re not going to draw down inventories like we thought we would,” said Chris Bake, a senior executive at Vitol Group, the biggest independent crude trader. “We’re still building crude inventories and that’s a problem.”
The global oil oversupply will persist into 2017 as members of the Organization of Petroleum Exporting Countries such as Saudi Arabia pump near record levels, others such as Iran and Iraq bolster capacity and production outside the group weathers the price slump, according to the IEA. Prices may struggle to hold above $40 a barrel unless OPEC acts, Citigroup Inc. predicts.
Crude is stuck at less than half the level it averaged at the start of the decade, straining the finances of producers around the world. Oil rallied last month on speculation OPEC and Russia might revive a pact to cap production, though prices have since cooled. Brent for November settlement fell 2.6 percent to $46.41 a barrel at 12:12 p.m. in New York on Friday.
Saudi Arabia told Iran it would be willing to reduce it’s output — which is close to a record 10.7 million barrels a day — if Iran were to agree to freeze at its current level of 3.6 million, according to two people familiar with the matter, who asked not to be identified because the talks were private. A second day of discussions between the two regional rivals at the OPEC headquarters in Vienna ended Thursday without an agreement. Saudi Arabia anticipates the meeting in Algiers will be a chance to consult rather than make a decision on output levels, an OPEC delegate familiar with the nation’s oil policies said.
While there has been a flurry of meetings between OPEC officials from Vienna and Paris to Moscow in attempts to reach consensus, there’s still skepticism a deal will be possible. All but two of 23 analysts surveyed by Bloomberg this week predicted there won’t be an agreement in Algiers on Sept. 28.
The volatility in supply created by the unexpected return of exports from Libya and Nigeria makes it harder to settle on any plan for stabilizing the market, Ed Morse, New York-based head of commodities research at Citigroup, said by phone.
“There’s just too much oil in the market,” said Morse. “It’s very difficult to come to the conclusion that a freeze would be credible or doable when you’ve got the combination of what’s happening in Libya and Nigeria. It makes a shambles of any extrapolation of balances.”
Libya’s output has climbed to 390,000 barrels a day after a halt in fighting between rival armed factions, National Oil Corp. Chairman Mustafa Sanalla said on Sept. 22. That’s 50 percent higher than the monthly average for August estimated by Bloomberg.
Nigeria has revived output to 1.75 million barrels a day following a cease-fire deal with militants in the Niger Delta region, Minister of State for Petroleum Resources Emmanuel Kachikwu said on Sept. 19. That compares with 1.44 million last month, near the lowest in more than two decades, according to data compiled by Bloomberg.
Russia pushed output to a record 11.09 million barrels a day in September, Energy Ministry data show. While President Vladimir Putin said on Sept. 2 that producers can overcome the tensions that have so far prevented an agreement, there are doubts over the practicalities of Russia’s involvement.
“No Russian contribution to a freeze is believable” as the government doesn’t have enough control over companies like Rosneft PJSC to prevent them from boosting supply, Citigroup’s Morse said.
OPEC’s last attempt at a deal with Russia collapsed in Doha on April 17 when Saudi Arabia’s influential Deputy Crown Prince Mohammed bin Salman insisted at the last minute that Iran had to participate in a freeze. Iran refused as it was just starting to revive exports following the end of international sanctions.
Now that Iran has returned to pre-sanctions production capacity, “the odds are in favor” of some basic agreement, said Helima Croft, chief commodities strategist at RBC Capital Markets LLC in New York. All producers may have a stronger incentive to cooperate as the global surplus lingers and low oil prices take a toll on their finances, according to Bassam Fattouh, director of the Oxford Institute for Energy Studies.
Chakib Khelil, the former Algerian energy minister who steered OPEC the last time it decided to cut supply, said he’s confident the groupwill reach an accord next week as low oil prices force members to act.
A pact could give exemptions to countries like Nigeria and Libya to restore output, but without any agreement there would be no restraint on OPEC supply. That could swell the global surplus projected for next year by the IEA, a Paris-based adviser to consuming nations.
“If they do not freeze, they risk sending the price into the $30 to $40 a barrel range,” said David Hufton, chief executive officer of PVM Group in London.