Up or down in OPEC, its oil supply all comes back to the Saudis

Oil prices have found some support from the potential for lower production from OPEC next year, as suggested by the group’s secretary general, Abdalla el-Badri.

Speaking to Platts by telephone from Vienna earlier this week, Badri was at pains to stress that he was not predicting the outcome of OPEC’s next scheduled meeting on November 27. Nor was he talking about a 500,000 b/d reduction in the group’s current 30 million b/d ceiling. He was, he said, talking about an outlook that pegged the call on OPEC crude at 29.5 million b/d. He was not talking about a decision by OPEC.

Badri, however didn’t make clear which outlook he was talking about. The latest forecasts from OPEC’s Vienna secretariat, released last week, see demand for OPEC crude averaging 29.45 million b/d and falling to 29.2 million b/d in 2015. Badri’s figure is closer to the International Energy Agency’s 29.6 million b/d estimate of the call on OPEC next year.

Nevertheless, Badri has directly raised the prospect of a reining-in of OPEC supply in 2015 as buoyant growth in non-OPEC supply — from the United States and Canada, in particular — more than meets growth in demand.

The big question is how any reining-in — either formally or informally — be done. OPEC’s ceiling is a number with little meaning because it is not the sum of 12 individual country quotas. This ceiling is supposed to include Iraq’s production, even though Iraq has not accepted a quota. How, therefore, would any cut — if one were agreed — be distributed?

Even more important is the question of who would cut. But first, let’s look at who is unlikely to.

Iran is hoping for a deal on the nuclear issue that will lead to the removal of sanctions that have slashed its crude output and exports. It will be more interested in boosting output and exports than reining them in further.

Iraq has lost nearly 300,000 b/d of pipeline exports through Turkey as a consequence of the jihadist advance across vast areas of northern Iraq. It now relies on its southern outlets in the Persian Gulf to export its oil, but pumping constraints are limiting the volumes that can be moved to the these southern terminals from the fields. Baghdad has not, in any case, agreed to participate in any kind of OPEC production management system.

Libya, thanks to a series of agreements with various militia and tribal groups, has boosted output back to around 700,000 b/d, half of the 1.4 million b/d it achieved before the oil field shut-ins and port blockades began in May last year. The climb in oil production in recent weeks comes, however, despite the deepening political chaos in the country. Libya will be doing everything it can to maintain and increase output further.

Among OPEC members, Nigeria and Angola have been particularly hit by the US shale boom. US imports of Nigerian crude plunged by 74% over the past five years, to 239,000 b/d in 2013 from 922,000 b/d in 2008. And the slide continues: US imports of Nigerian crude averaged just 86,000 b/d in the first half of 2014 compared with 338,000 b/d in the same six months of last year. Nigeria will be continuing its search for new markets rather than restricting its access to them. US imports of Angolan crude dropped by 60% over the five years, to 201,000 b/d last year from 504,000 b/d in 2008. January-to-June volumes fell to 116,000 b/d this year from 200,000 b/d in 2013.

Any meaningful reining-in of OPEC output, therefore, has to come from Saudi Arabia, the only OPEC member with significant surplus capacity and the ability to adjust its production up and down in response to market conditions.

But Saudi Arabia’s priorities are far from clear at this point. It emerged last week that the kingdom had cut its its crude production by some 400,000 b/d between July and August. There has been no explanation from Riyadh for this cut, which has been interpreted in some quarters as an indication that the OPEC kingpin is ready to defend prices. But if this was indeed a signal, it conflicted with Saudi Aramco’s crude price cuts for October, announced a few days earlier.

Saudi Arabia and other Middle East producers have long been focussing on Asia, the engine of demand growth. But as the US shale revolution continues to transform world oil markets, they are now having to compete in Asia against West African and other producers that have lost market share in the US.

Saudi oil minister oil minister Ali Naimi, in Kuwait last week for a regular meeting of Gulf energy ministers, was sanguine about the oil price fall below $100/barrel. He didn’t see what the big fuss was all about and said oil prices went up and down all the time.

Analysts and journalists will continue to debate whether Saudi Arabia’s priority is market share over price, or vice versa. But, for the time being, the enigmatic Saudis are giving nothing away.

platts