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Upping the ante
OPEC commits to increase oil production, but consequence remains unclear Alan Bailey Petroleum News
During a much awaited and scrutinized meeting of the Organization of the Petroleum Exporting Countries in Vienna on June 22, the cartel agreed to increase oil production, with the intention of stabilizing the global oil market. However, the somewhat obscure nature of the agreement has left considerable uncertainty over what the impact of the agreement will actually be.
In a communique following the meeting the agreement was expressed as a terse statement referencing the existing production target, set in November 2016. Given that actual production has fallen by more than the targeted amount by a factor of 152 percent, the conference has decided that “countries will strive to adhere to the overall conformity level … down to 100 percent, as of July 18” for the remaining duration of the original agreement, the statement says. In other words, the agreement is to endeavor to increase production to match the levels that had been expected as a consequence of the November 2016 target.
Russia has reportedly agreed to comply with the new agreement.
What does it mean? But what will the agreement mean in terms of actual production increases?
The cartel has indicated that a 100 percent match with the original production targets would result in a production increase of 1 million barrels per day relative to current levels. But the term “will strive to adhere” seems to fall short of a firm commitment, and some have expressed skepticism over the extent to which production will actually increase. In fact, oil prices responded to the agreement by increasing rather than going down.
Prime reasons for OPEC oil production dropping by substantially more than had been planned have been the collapse in Venezuelan production, coupled with production falls in Angola and Libya. Production from Venezuela, in particular, seems set to fall further. And there is continuing uncertainty over future Iranian production, given President Donald Trump’s move to re-instate sanctions on Iran.
Spare capacity On the other hand, Saudi Arabia and Russia have spare production capacity and could presumably ramp up their production to help address the new OPEC policy. According to a report in Bloomberg, Saudi Arabia has commented that it plans substantial production increases.
Another wild card in the global oil production pack is U.S. shale oil. Shale oil production has been increasing steadily, driven by a business model that enables relatively rapid production responses to changes in the oil price. However, production from the Permian basin, a major play within the U.S. shale oil scene, is hitting something of a ceiling because of capacity limitations in the pipeline system for delivering oil from the basin to market. Work is underway to expand the pipeline capacity, but this work will take some time to carry out.
Growing demand When it comes to future trends for the global oil price, oil demand obviously plays a critical role. Most analysts predict a continuing increase in global demand as the global economy grows, and as affluence increases in the developing world, particularly in China and India. A crucial question remains regarding the extent to which that demand growth may exceed production growth, the extent to which spare capacity within OPEC or Russia can be brought on line, and the extent to which U.S. shale oil production can respond to any price escalation.
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