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Capping Libya, Nigeria Output Won’t Help Erase The Glut

The steady recovery of oil production in Libya and Nigeria in recent months has prompted OPEC to consider limiting the output of the two African producers that are currently exempt from cuts in the deal.  

The Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC) is gathering in Russia on July 24, and has invited Nigeria and Libya to attend to discuss their current production and short-term plans. According to Kuwait’s Oil Minister Issam Almarzooq, OPEC might ask the two nations to cap output as soon as possible.

Talk of Libya and Nigeria possibly capping crude production has had little effect on the market, and analysts doubt that a limit would be lower than the current production of the two countries. Observers think that the two producers would agree to cap output when they reach their short-term production targets, which is 1.25 million bpd for Libya and 1.8 million bpd for Nigeria.

If those two OPEC members were to limit output when they reach their desired respective levels of production, all other participants may have to review their quotas to compensate for the African duo’s increased output, some analysts reckon.

That is, if OPEC and friends really want to do “whatever it takes” to erase the global oversupply and lift the price of oil.

According to OPEC’s latest Monthly Oil Market Report, Libya and Nigeria contributed the most to the 393,000-bpd increase in the cartel’s total crude output in June compared to May. Libya’s output jumped by 127,000 bpd to 852,000 bpd, while Nigerian crude production rose by 96,700 bpd to 1.733 million bpd.

The combined Libya-Nigeria production growth last month was nearly half of what OPEC’s biggest producer, Saudi Arabia, must cut under the deal. According to data compiled by Bloomberg, the two exempt producers increased their combined output in the past two months—May and June—by 440,000 bpd, almost the entire volume that Saudi Arabia is taking off the market each month.

So production growth in Libya and Nigeria is really offsetting a large part of the OPEC cuts. Related: The Major Wildcard That Could Send Oil To $120

Libya is right on track to reach its goal to raise crude output to 1 million bpd by the end of July.

Nigeria, for its part, signaled on Wednesday that it would be willing to cap when it reaches a stable production of 1.8 million bpd, according to Oil Minister Emmanuel Kachikwu.

"You have to watch it for a couple of months to be sure that what you see as peace is in fact sustained,” Kachikwu noted.

Nigeria is very close to reaching 1.8 million bpd, with June production averaging 1.733 million bpd per OPEC secondary sources.

According to Nordine Ait-Laoussine, president of Geneva-based consultant Nalcosa and former energy minister of Algeria, bringing Libya and Nigeria on board without revising the quotas for other members would only be “exacerbating the problem of excess supply.”

“It’s not going to be easy just to say ‘Maybe we should just bring Nigeria and Libya into the line and it will be fine’,” Ait-Laoussine told Bloomberg.

And if Libya and Nigeria do reach their desired production levels, total OPEC output could be close to 33 million bpd by the end of this year, according to Ait-Laoussine.

“OPEC would be producing too much if the other quotas are left unchanged,” he said.

However, revising the parameters for the cuts would be like OPEC “opening a big can of worms,” Thomas Pugh, commodities economist at Capital Economics Ltd, told Bloomberg. There is little political will to deepen the cuts, according to Pugh.

Analysts and investment banks have been warning for some time that without steeper cuts by OPEC, oil prices could slip to US$30. The ‘deeper cuts’ narrative has been going on since the market and OPEC itself had to admit that the oversupply is not diminishing at the pace the cartel had expected. In one of the most recent comments on the topic, OPEC’s Secretary General Mohammed Barkindo said that no further cuts are on the agenda for the July meeting of the JMMC in Russia.

While OPEC and Russian officials are saying that ‘nothing is off the table’ and ‘nothing is on the table’ every other day, analysts and investment banks are increasingly citing rising supply from Libya and Nigeria as the main driver – together with U.S. shale – for the drastic cuts in their oil price forecasts. Earlier this week, BNP Paribas slashed its WTI forecast for 2017 by US$8 to US$49 per barrel and the Brent forecast – by US$9 to US$51. The cuts in the 2018 forecasts were even more drastic - down US$16 to US$45 for WTI, and US$15 off the Brent price projection, to US$48. BNP Paribas is the latest bank to slash forecasts in a series of cuts in oil price projections that major banks have made over the past month.  

By Tsvetana Paraskova for Oilprice.com

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