Introducing The Pre-Freeze Oil Boil
Most oil-market observers will be keenly aware of a meeting in Algeria later this month at which the world's biggest producers will -- or won't -- commit to freezing their crude production. While talking about freezing supply may have helped to put a floor under oil prices, the outcome of the meeting itself is becoming more redundant by the day as almost all the world's top producers do exactly the opposite.
The big-4 Gulf Arab OPEC countries -- Saudi Arabia, Iraq, the U.A.E. and Kuwait -- are all producing at, or very close to, record levels. The reasons vary, but for each it comes down to pursuing established medium- to long-term market strategy. At the same time, output from neighboring Iran is at a five-year high, as the country races to restore pre-sanctions output and exports. No sign of a freeze here.
Things are no different in Russia, which averaged more than 11 million barrels a day in the first half of September -- close to the record levels achieved in the mid-1980s. New fields in the Caspian Sea and the far north are starting to yield their first oil and there should be more to come 1 in the months ahead.
Meanwhile, the two OPEC members whose production has been hit hardest by civil unrest are eyeing their own renaissance.
In Nigeria, ExxonMobil is preparing to resume shipments of Qua Iboe crude, the country's biggest export grade, while Royal Dutch Shell lifted restrictions at the Bonny terminal earlier this month. Combined exports of Qua Iboe and Bonny Light averaged more than 500,000 barrels a day last year, according to Bloomberg estimates.
Libya has lifted force majeure, a legal clause that allows companies to halt shipments without breaching contracts, at two of the country's three largest export terminals -- Es Sider, Ras Lanuf -- which have been out of operation since December 2014. This may allow Libya to double output to 600,000 barrels a day within four weeks and 950,000 barrels a day by the end of the year, National Oil Company Chairman Mustafa Sanalla said Tuesday.
Non-OPEC South Sudan, which saw output fall by more than half to at most 130,000 barrels a day after civil war erupted in 2013, is also aiming to restart production from fields in its Upper Nile region next month.
All three countries may struggle to sustain any increase because underlying political problems remain unresolved. In addition, the damage to oil production and transportation infrastructure in Libya and South Sudan has yet to be fully assessed. If it's extensive, then they may miss production targets.
Nevertheless, the countries are enjoying a more positive outlook for oil production than they have for many months.
As if that wasn't enough, both the International Energy Agency and OPEC last week cut their forecasts of how much of the group's oil will be needed for the rest of this year and next -- although they come at this revision from opposite directions. The IEA pared its global demand outlook most severely for the current quarter, but also out to the end of next year, which is as far as its monthly report looks. OPEC -- which already expected weaker demand growth than the IEA -- has raised its forecast of non-OPEC production, partly to reflect the imminent start-up of the giant, but much troubled, Kashagan field in Kazakhstan.
WTI crude is down around 16% from its early-June peak of nearly $52 a barrel, a price level that the forward curve does not regain until 2019. That's 18 months later than it was a month ago.
Without a deal in Algeria that goes much further than an output freeze, "Lower for Longer" just got "Lower for Even Longer" -- again. Just don't expect the key players at that meeting to do anything meaningful about it. After all, their oil is still the cheapest in the world to get out of the ground.
As long as companies can keep control of decline rates at older fields in West Siberia, many of which have been pumping out crude for more than 40 years.
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