OPEC decision: better late than never
So, OPEC, paying no attention to the negative forecasts of the western media, decided to reduce oil production. By the way, it is becoming a global trend that events develop DESPITE the information pressure; it is too often based on false assumptions. Agreement could have been reached earlier. But, as they say, it’s better late than never. The reasons for the lengthy disputes will be clearer if we compare OPEC production data for last year with the planned reduction (see the table).
The table shows the logic of the conference’s participants clearly. Three countries that have suffered for the recent years are highlighted. In Libya and Nigeria civil wars have been going on, their production has decreased by 60 and 10% respectively. Iran has been under sanctions, lost a quarter of its production, though this year it compensated a considerable part. These countries were freed from reducing their production and Iran was allowed to increase production up to 90 thousand barrels a day. Note that all the three countries have a production margin, though it can’t be turned into actual barrels tomorrow. It will take them at least 1-2 years, primarily they need to stop fighting, and they are not even close yet.
Then the remaining amount of production decrease was divided equally between the other members of the cartel. Each got 4.6% of its production. No exceptions were made even for the small freshman Gabon. Indonesia, which does not export oil and joined OPEC “for the sake of perspective” found itself in the most stupid position: it would have to restrict itself in petrol. That is why it suspended its membership in OPEC. And right it was: this is an organization of oil EXPORTERS, not clubbers.
Now let’s compare the production levels for January 2016 (fact) and 2017 (plan), which are highlighted blue in the table. They are almost equal for the cartel integrally, with the tiny 0.4% difference. The Arabian Four: Saudi Arabia, Iraq, Kuwait, and UAE increased production by 4-5% during the year and now they are decreasing it for the same amount. The other exporters, first of all Venezuela, Angola, Algeria decreased production last year and now they are going to decrease it even further.
This is cruel but fair. The largest exporters demonstrated that they have a real productivity reserves, which according to my estimation amounts to 0.9 -1 million barrels a day. The reserves is unlikely to be more, or it would have been put into production. The other countries have no spare capacity, they are recovering all they can with the current prices.
Russia also increased production from 10.83 to 11.2 mbpd and now it can painlessly cut the production by 300 thousand bpd, going back to the January’s level. Consequently, we will have some productivity reserves, though almost 3 times less than Middle-East exporters. Kazakhstan has just put the block in Kashagan oilfield into operation, so it hasn’t voiced its decision on production cut yet.
Besides, Oman and Azerbaijan intend to reduce recovery to the same quota as OPEC, which will amount to the total of 76 thousand bpd. Mexico is not participating in negotiations with OPEC, but it is planning to reduce production by 215 thousand bpd. Other major oil producers: Canada, Norway, the USA and China are also expecting to reduce their production next year.
Later it turned out that preliminary negotiations were at the verge of failure several times because of the positions of Saudi Arabia, Iran, Iraq and even Indonesia. A night phone talk between Russian and Saudi ministers saved the situation. That was when Russia demonstrated the intention to join the production cut and contribute a feasible input of 300 thousand bpd. This strengthened the position of OPEC leaders and helped them to overcome the disputes.
The actions taken by Russian Energy Ministry in terms of cooperation with OPEC should be highly estimated. With no rush or particular claims, due to simple but very timely decisions, Russia is gaining recognition in the oil world. Even though other countries are its leaders now, it’s good enough that they consider our attitude, because this benefits everyone.
Oil prices reacted to OPEC’s decision by a surge: Brent grew to $54.49, by 16.4% in 2.5 days, WTI by 15.3% (see the picture). Note that the gap between them also increased by almost a dollar and reached $2.8; Americans seem to believe in shales revival. It will be short-term, but we’ll talk about it some other time.
On the daily chart WTI came close to the resistance $51.7, but couldn’t overcome it. So, the trend will finally establish next week. The chances for growth are higher.
Another coming event is a joint meeting of OPEC members and the representatives of other oil producing countries, which will take place on 10 December. Opponents will use ALL means to drive a wedge between the participants. It is good that the meeting will take place in Moscow. Russian president may find time to talk to the global oil producers, and he knows how to persuade people, especially when it comes to mutual profit.