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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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What Happens If The OPEC Deal Expires?

OPEC appears to be nervous that its production cut deal will once again fall short, and the group is already discussing the possibility of yet another extension.

While the aftermath of Hurricane Harvey continues to drive headlines in the energy sector, the attention will once again shift back to OPEC as the year wears on and we head into 2018. OPEC had hoped that a nine-month extension of its original six-month production cut deal – 1.2 million barrels per day from OPEC, plus reductions of nearly 0.6 mb/d from non-OPEC countries – would be enough to “rebalance” the market. But with seven months or so left to go on the deal, they are already coming around to the conclusion that it won’t be enough.

Part of the reason for the group’s struggles is that the two exempted members – Libya and Nigeria – have added large volumes of new supply this year. Nigeria’s output is up to about 2.2-2.3 mb/d, according to government officials, a figure that includes condensate. Based on that figure, S&P Global Platts says Nigeria’s crude output probably stands at about 1.8 mb/d, which comports with OPEC’s latest estimate. In other words, Nigeria is now producing about 400,000 bpd more than it was a year ago on the eve of the original OPEC agreement.

Libya too has ramped up output dramatically, topping 1 mb/d recently, essentially twice as much as a year ago, although Libya’s output has seesawed lately on pipeline and oilfield outages.

Although exact figures are a bit elusive, those two countries have added between 700,000 and 900,000 bpd of new supply in the past year, going a long way to offsetting the production cuts from the rest of the OPEC.   Related: An Energy Independent North America Needs NAFTA

In other words, one of the principle reasons that OPEC’s efforts to balance the market are floundering is because of the resurgence of supply from its exempted members, Libya and Nigeria. It is no wonder why OPEC officials are trying to bring Nigeria, at least, formally into the agreement by taking away its exempted status. In the past, Nigeria’s oil minister Emmanuel Kachikwu said that Nigeria would join the agreement when its oil production returned to 1.8 mb/d, a threshold it appears to have reached.

OPEC has invited both Libya and Nigeria to its upcoming monitoring meeting on September 22. The pressure to put a limit on Nigeria’s production could rise ahead of the official meeting at the end of November.

But even capping Nigeria’s output at its current rate would not solve OPEC’s problems. That is why the group is reportedly considering another three-month extension, pushing the deal through mid-2018. The proposal is gaining traction, and there are some signs that other members, including Iran, could sign on.

“There are concerns that if OPEC and non-OPEC producers exit the market in March, traders will react quite negatively to it and behave as if the market is in a free fall,” a senior Saudi oil official told the Wall Street Journal. “This also ensures that producers won’t pump full tilt and push prices down.”

An extension would surely be welcomed by oil traders looking for some reassurance that prices won’t crash again. Plus, compliance has actually ticked up a bit recently, with Iraq, in particular, boosting its efforts. Related: Failed Oil Price Recovery Slams Energy Stocks

But letting the deal lapse in June 2018 as opposed to March is not really a game-changer. A much bigger question is what happens when the deal expires, regardless of the precise end date. What is the exit strategy? Will the group immediately go back to producing at maximum capacity? Not only are there not answers to those questions, but there is little evidence that top OPEC officials have any semblance of a strategy beyond keeping the current cuts in place for the time being. An extra three months might not do a lot to move the market closer to some sort of balance.

And based on OPEC’s current output, and the current supply/demand dynamics, it could arguably take years to normalize inventories. “If they wish to achieve the reduction of oil stocks down to the five-year average, they’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, told Bloomberg in an interview last month. “Rebalancing is a stubborn process.”

By Nick Cunningham of Oilprice.com

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  • ace on July 28 2018 said:
    Hey Nick,

    I'm very curious what happens as well. I'll admit I'm not the expert on Oil and Gas I'd like to be, but I've been looking at this and I have some.... concerns. At the end of 2016, it was reported that the "usual suspects" (OPEC, I'd assume) were not going to reinvest in US Treasury Bonds. This seemed to spell disaster - the same worry that if China were to dump our Bonds in this almost-trade war. Which we're told will never happen because that would crash the world and it wouldn't benefit them. So that seemed to be the worry at the end of 2016. I saw Russia declare that they wouldn't trust Hillary, and we miraculously got Trump, the only person who could get them to engage in Oil Reductions. (Gee, what a coincidence. But let's just say Russia did it LOL)

    So anyway, things are "great" now and the economy is doing well, driven by Treasury investment, and Oil sales among higher prices. But several factors have me worried. First of all, this seems entirely temporary. As you ask - what happens when Reductions expire, which, as far as I know, are supposed to happen by the end of 2018? We do seem to be in "oh shit" mode as clearly we've lost Syria, and have no sturdy support of our banking system. Oil sales are great and all, but that won't last, will it? I can see this is why we're trying to wrest control of oil prices from OPEC, so we have some control, but that's no big save either. Obviously, this announcement that the EU will "in the future, like, someday bro" buy our LNG doesn't help us at the end of 2018. Tarriffs, Space Force spending, these are all ways we're showing an absolute desperation to recover GDP to cushion us from a collapse that comes when OPEC deserts Treasury Bonds, after Oil cuts expire. We don't even have labor to cushion the fall.

    So, am I missing something here? Why aren't people terrified of this? Why won't we end up just where we were in 2016? Are oil profits and Treasury investments so much that they will have us doing well enough for another 10 year slide, buying us enough time to figure it out? Or... are we headed off a cliff, once cuts expire??

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