OPEC attempts correction in oil market with increase

By Ovunc Kutlu

NEW YORK (AA) - A decision by OPEC and non-OPEC to boost crude production by around 1 million barrels per day (mbpd) last week is an attempt to correct the oil market, an expert told Anadolu Agency on Tuesday.

OPEC had agreed in November 2016 to reduce 1.2 million bpd from its output at that time. In December 2016, Russia and non-OPEC producers said they would reduce their production by 600,000 bpd. The agreement was later extended until the end of this year.

On Friday, OPEC announced that it will increase its crude production by reducing the level of compliance from its previously agreed quotas from more than 150 percent in May to 100 percent as of July 1.

The cartel met Saturday with Russia and other non-OPEC countries when they agreed to reduce their compliance levels to 100 percent.

"I think it's important to recognize the signal coming out of the OPEC meeting," Yasser Elguindi, Director of Macro Research at Energy Aspects in New York, told Anadolu Agency.

"What the Saudis, other GCC members and Russia are clearly saying is that we don't want to overtake the market. We've cut more than we were supposed to, and we're making strong efforts in order to correct that for the summer," he added.

Thomas Pugh, a commodities economist at the London-based Capital Economics, wrote in a note that OPEC is currently producing almost 1 million bpd below its collective quota; and Saudi Arabia, Kuwait, the United Arab Emirates and Qatar collectively produced about 900,000 bpd less in May than they did in December 2016.

"OPEC has moved back to a collective quota. This means that those countries which have spare capacity, such as Saudi Arabia and its Gulf allies, will be able to boost production significantly," he added.

Some OPEC members, however, and some others find it difficult to boost their output levels.

"You have this problem of Venezuela, Angola and a few other producers that are unable to increase production. The reason why there is overcompliance, why OPEC has cut more than they were supposed to, is because of the acceleration and declines in Venezuela and in Angola," Elguindi said.

"It's not just Iran and Venezuela. Libyan production is down. Nigeria has had some problems. There are a lot of potential sources of supply disruption," he added.

Pugh said if Venezuela manages to increase its production by 300,000 bpd for the rest of the year, as it pledged on Friday, then the cartel may quickly exceed its quota.

"OPEC has found it difficult to police group quotas in the past, so there is a risk of production rising above its target," he said, adding that “Saudi Arabia has said that the group quota implies an indirect reallocation of extra production from those that are unable to produce more oil to those that can do so."

Elguindi said Saudi Arabia is estimated to increase its crude production by some 500,000 mbpd from now until the end of this year. For Russia it’ll be 150,000 bpd during that period.

Before last week's meeting, Russia proposed OPEC and non-OPEC raised output by 1.5 million bpd, while Saudi Arabia and its Gulf allies supported an increase of somewhere between 300,000 to 600,000 bpd.

Elguindi said the mismatch between the previously announced figures by Saudis and Russia was a result of different timelines considered by the countries.

"People would talk about levels but they never talked about duration -- meaning Russia was looking more at 2019, in terms of what would production look like between now and the end of 2019. So, it's not inconsistent for Russia to say we should increase 1.5 million barrels a day, because they're looking at a longer term horizon. Whereas, OPEC was looking in terms of the very near term," he explained.

OPEC and Russia will now increase production by a total of around 1 million bpd over the rest of this year, which "should ensure ample supply and help to pull prices down," Pugh said.

He added that since global oil demand growth is anticipated to slow over the next year, Brent crude is forecast to be around $65 per barrel at the end of this year.

"The significant risk to this forecast is that production in Iran or Venezuela collapses, which could offset all of the increase in output from the rest of OPEC and Russia, resulting in a much tighter market," he said.

Elguindi noted that OPEC and non-OPEC nations will meet in September to discuss quota levels, individual countries' output levels, and whether that's an appropriate level of production for each country or not.

"Plus, it could very well be that by September we can see Venezuela's production has declined even more, and OPEC as a group will have to reassess," he concluded.