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Has Saudi Arabia Pushed OPEC Too Far?

Drilling rigs stacked

Surely the latest actions by OPEC in Algiers threatens the very core of the cartel, given its members have agreed to something that is going to be extremely difficult to follow through on. To coin a phrase (well, kind of) from Top Gun, the cartel's oil ministers are writing checks that OPEC can't cash.

OPEC is currently producing 33.237 million bpd - nearly 750,000 bpd above their new production target of 32.5mn bpd. Granted, Saudi Arabia is set reduce production at this juncture, back-pedaling away from its summer peak of 10.6 million bpd, as the need for direct-burn power generation ebbs, but the best case scenario for this drop would be ~500,000 bpd, taking the kingdom back to a Q4 2015 level of 10.1 million bpd.

This would leave an additional ~250,000 bpd to be cut by the cartel by November. This would mean a cut of less than 20,000 bpd by each cartel member, right? Wrong.

(Click to enlarge)

(chart source)

Not only are Nigeria and Libya exempted from the production cut, but Saudi Arabia appears to have agreed to a small incremental increase from Iran, allowing them to lift production to 3.7 million bpd. This concession alone indicates Saudi’s willingness to put a production cut in place. Venezuela are also said to have been given a carte blanche on cutting.

This leaves ten members left to share the burden. But hang on a minute. If Libya has already increased its production this month by 200,000 bpd, and Nigeria is attempting to get back to pre-Niger Delta Avenger production levels of ~1.8 million bpd, and Iran is allowed to increase output by a further 100,000 bpd, that more than cancels out the Saudi’s impending seasonal swoon. Production in November should be higher than now (and if Libya and Nigeria get their way...much higher).

While Iran, Libya and Nigeria may be happy with their lot, there is dissension among the ranks elsewhere. Just last month Iraq reached an agreement with BP, Shell and Lukoil to restart investment in oil projects in the country, projected to boost output by up to 350,000 bpd next year. Our ClipperData highlight how their exports have been on a tear already in recent years as production has ramped up:

(Click to enlarge)

Iraq's new oil minister, Jabar Ali al-Luaibi, immediately complained after Wednesday's meeting was concluded, saying that its production level of 4.35 million bpd was being underestimated, and as such it wouldn't accept an agreement in November unless this was addressed.

All this points to the conclusion that Saudi has pushed for a production cut, as the low oil price environment has taken a massive toll on its economy. But while it has managed to gain a consensus for a cut this week, November's meeting is when the real fireworks begin, as the minutiae of the output target appears highly challenging to achieve.

(Click to enlarge)

Two scenarios seem likely from November's meeting at this point: the cartel is going to fall back into old habits, and Saudi is going to have to do the heavy lifting for a cut. Or a constructive path forward is beyond reach, and the cartel dissolves into chaos once again.

By Matt Smith

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