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Why Oil Markets Should Brace For OPEC Disappointment


There is a strong possibility that OPEC disappoints the oil markets in the coming days, offering either no production limit or a toothless agreement that may not even be finalized until some future meeting.

OPEC talked up an oil price rally in August by floating the possibility of a freeze deal, but has since all but admitted that nothing would come of the Algeria meeting, at least not right away. In any event, a freeze on record high production was always going to be an underwhelming result, even if the oil markets did not catch on to that fact right away.

Thus, next week OPEC might push down oil prices with a disappointing result from Algeria. But the problems for any oil price rally might only get worse from there. That is because more supplies are set to come online in the coming months.

First there is Libya, which has quietly brought back about 190,000 barrels per day of oil production since August, according to Bloomberg. Output is now up to 450,000 barrels per day as several oil fields resumed operations. The Seadelta oil tanker left the Ras Lanuf port on September 20, the first shipment from the country’s third-largest oil export terminal since 2014. The tanker carried 781,000 barrels of oil and headed for Italy.

Production and exports could climb from there – Libya is hoping to hit 950,000 barrels per day by the end of the year. With the export terminal back online, Libya could succeed in boosting its output for the first time in years.

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Even if the nearly 1 million barrels per day (mb/d) objective proves to be too optimistic in the near-term, if Libya can ratchet up production from today’s levels, it would extend the slump for crude, ensuring a longer period of low oil prices.

Nigeria is also throwing more barrels onto the already oversupplied market. The Niger Delta Avengers have called off attacks and are negotiating with the Nigerian government, allowing for the return of some supply. Nigeria’s Minister of State for Petroleum, Dr. Ibe Kachukwu, said that the country has succeeded in bringing back more than 200,000 barrels per day in recent weeks, taking output up to 1.7 mb/d. The violence in the Niger Delta is far from over, and new militant groups could still emerge to threaten the country’s energy infrastructure – a bomb from a new group hit an oil pipeline operated by state-owned NNPC a few days ago – but if Nigeria can continue to bring back lost production, the oil markets could see several hundred thousand barrels per day of additional supply.

Then there is Russia, which just hit a record high for oil production in the post-Soviet era. Russia’s production topped 11 mb/d in September, the highest monthly total in decades. The achievement means that Russia is more than willing to agree to an OPEC freeze deal, because doing so will lock in record levels of production. Russia’s energy minister Alexander Novak said a few weeks ago that Russia would be willing to sign on to a freeze, using any of Russia’s monthly totals from the second half of this year as its cap, a small concession given the latest record-breaking total.

Related: EIA Boosts Oil Prices With Huge Draw Report

Iran, too, could add more production in the coming months, although that could be a heavier lift since much of Iran’s low-hanging fruit has already been brought back online. More gains will likely require more investment, but still, any surprise from Iran will be on the upside.

“We are about to see a big jump in production once the Libyan situation resolves…the Nigerians are coming back online, and the Russians of all people are going to bring 200,000 barrels more to the market by the end of the year from a big field they’ve got going in the Caspian. So, I mean, it’s just a joke,” John Kilduff of Again Capital Partners, said on CNBC, referring to the possibility of a price increase. “I think we reach $40 on the way down,” he added, predicting more declines ahead for crude oil.

The oil markets will put an excessive and unwarranted amount of attention on what happens in Algeria. Meanwhile, global supplies could climb in the next few months.

By Nick Cunningham of Oilprice.com

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