OPEC Urges Nigeria, Libya To Join Oil Production Cuts; Iran Balks

At the time the OPEC/non-OPEC production cut agreement was agreed upon in November 2016, Libya’s oil production was starting to recover but the security situation in the country was still precarious. So Libya was exempted from joining the production cut agreement provided it capped its oil production at 1 million barrels a day (mbd).

Nigeria was also exempted because of attacks on its oil production facilities disrupting production.

Since then Libya’s production has hit almost 1.3 mbd and Nigeria’s has been boosting its production in recent months. They are now being asked by other OPEC members to join the production cut agreement which is still in force. However, the two countries are seen reluctant to cut because of a still fragile security situation, but this time around, the other OPEC members may not listen to any excuses and are urging the two African members to join a possible cut.

Libya may be asked to cap its production at 1.2 mbd thus cutting its production in effect by 100,000 b/d. Nigeria could also be asked to cut production by 150,000 b/d.

However, the overwhelming majority of OPEC members are not in favour of new cuts. Instead, they will demand that Saudi Arabia and Russia withdraw the 650,000 barrels a day (b/d) they jointly added to the market in June against OPEC members’ wishes and return them to the original 1.8 mbd cut under the OPEC/non-OPEC agreement.

It is very probable that a cut of production will be agreed upon in the OPEC meeting tomorrow in Vienna. But who will be doing the cutting?

Saudi Arabia will end up doing most of the cutting with some symbolic reduction from Russia estimated between 100,000-150,000 b/d as a show of solidarity with the Saudis.

There is some divergence between the Saudi and Russian approach to the cuts. Saudi Arabia needs an oil price higher than $80 a barrel to balance its budget. On the other hand, Russia can live with an oil price of $40 or even lower having benefited from the diversification drive of its economy since the 2014 oil price crash. Moreover, the bulk of Russian oil production is being carried away with private Russian companies with a small State stake. These companies have invested heavily during the last few years to raise Russia’s oil production to the highest level in the post-Soviet era. They are not keen on cuts as they want to recoup their investments very quickly.

Still, Saudi Arabia may surprise the world by refusing to cut production following in the foot steps of its discredited strategy of flooding the global oil market as it did in the aftermath of the 2014 oil price crash. But this time its economy will suffer far worse than in 2014 particularly that its financial reserves have fallen from $750 bn in 2014 to $500 now most of which is needed to prevent a devaluation of the Saudi currency.

On balance, Saudi Arabia will decide to bite the bullet and do most of the cutting as the least of two evils.

Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London