Will OPEC Extend Oil Production Cut Deal At Next Meeting?

Oil & Gas
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Wednesday, September 20, 2017 / 3:10 PM /FDC

Two months before the next regular OPEC and Non-OPEC meeting in Vienna on November 30, 2017, the parties are already maneuvering to make their cases for what should happen. Already, OPEC and Non-OPEC oil ministers are discussing whether to extend the production cut deal past March 2018.

On September 5, Russian oil minister Alexander Novak said Russia would consider supporting an extension of the deal past March if data shows that the oil glut has not abated. This reflects a shift from July, when Novak said he did not see a need to extend cuts. Russia and Saudi Arabia recently reaffirmed their commitment to shared goals in the energy industry with a visit to the Kingdom by Russian Foreign Minister Sergei Lavrov.

Saudi oil minister Khalid alFalih also traveled to Venezuela to meet with the embattled President Maduro. There the Venezuelan President affirmed his support for extending the production cuts beyond March 2018. This is not surprising given the fact that Venezuela’s oil production has remained below its quota for several months, and there is no indication Venezuela has the ability to increase production anytime soon. According to S&P Global Platts, Venezuelan production declined even further in August, from 1.91 million bpd to 1.90 million bpd.

Venezuela’s early commitment to extending the production cuts is not surprising given the country’s economic woes and the financial problems of its national oil company, PDVSA. However, Venezuela’s strong commitment could help influence other South American oil producers to commit to continue the production cuts.

In July, Ecuador, made headlines by stating it planned to unilaterally raise production. Though Ecuador later toned down its statements, the country has continued to exceed its quota. Venezuela, despite its economic and political chaos, is still the most prominent South American oil producer and could pressure Ecuador to adhere to its quota and support an extension of the cuts.

In truth, none of these early commitments are surprising. All eyes should be on Libya and Nigeria, the two OPEC countries that were exempt from the production cuts. Libya’s oil production has not been steady. The government closed a pipeline from the Sharara oil field after militants took it over in mid-August. However, on September 6 the two sides reached an agreement and oil began flowing again. The Sharara oil field was taken over by militants in mid-August. When this happened, the Libyan government turned off the pipeline carrying oil from that field and cut off production.

Nigeria’s oil minister, Emmanuel Kachikwu, stated that Nigeria cannot join the production cuts at least until after March 2018, because it needs additional “recovery time” from the outages caused by other militants in that country. This could present a problem at the next OPEC meeting, because non-OPEC participants have long seen the exemptions given to OPEC members Libya and Nigeria as unfair.

In the next two months traders should keep an eye on the statements coming from OPEC and non-OPEC oil producers. Statements affirming commitment to the deal from countries like Saudi Arabia, Iran, Iraq, and Ecuador should move oil higher. A positive statement from Nigeria or Libya regarding any intention to participate in the deal should also cause oil prices to move higher. On the other hand, negative statements from Libya, Nigeria or Kazakhstan that undermine support for the deal could move oil prices lower.

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