Dubai: When oil ministers from both Opec and non-OPEC countries meet on April 17 in Doha, they will face a challenge; they need to find a way to cut oil production — not just freeze crude production to support prices, oil experts said.
Freezing oil production levels alone at January’s peak levels, a move that will likely not have the support of smaller oil producers, will not be sufficient to raise prices, the experts say.
“An agreement to freeze production at the January 2016 levels is meaningless and will not lead to a rise in oil prices. Only a cut of production exceeding 2 million barrels a day (bpd) will do the trick,” Mamdouh G Salameh, international oil economist and visiting professor of Energy Economies at ESCP Europe business School in London told Gulf News.
Others energy researchers expressed similar view.
“There is a need to cut,” said Hasan Ozertem, energy researcher at Ankara-based International Strategic Research Organization (USAK). “Freezing at the peak level (of production) is not a clear message given to the markets,” nor does it means limiting global production, Ozertem added in an interview with Gulf News.
Ozertem explained that freezing production means there will be sustainable production in the upcoming year; however, without the participation of “Iran, Iraq and other countries, namely Libya, the production level might be higher and the freezing of Saudi Arabia and Russia won’t take the prices at higher levels. There is a need for a cut,” stressed the Turkish energy oil expert.
Agreement on a freeze to the production levels of “couple of years ago, could also mean a kind of cut,” said Ozertem.
Oil producing countries have faced drastically falling oil prices since June of 2014, when oil was a $115 a barrel, due to a flood of US shale oil. Rather than cut oil production in hopes of raising prices, Opec nations, led by Saudi Arabia, decided to fight for market share instead. The global surplus in oil caused the commodity to drop as low at $27 per barrel in January. Prices have since recovered slight to a range between $38 to $42 a barrel, thanks mainly to an agreement in February between Saudi Arabia, Russia, Qatar and Venezuela to freeze their output at January levels. Oil prices have retreated on Thursday from the $40 a barrel (Dh147) range, while the global Brent benchmark was down 2.6% at $39.42 a barrel on the ICE Futures Europe exchange, with concerns over growing oil stocks of the US crude supplies. US Department of Energy data showed US crude supplied climbed by 9.4 million barrels last week, three times higher than previously estimated by analysts.
Qatar announced later it would host a meeting for Opec and non-OPEC members on April 17 to discuss a global pact to freeze the production. According to the OPEC’s Secretary-General Abdallah Salem Al Badri, nearly 15 oil producers — including the UAE — are expected to attend.
Al Badri was quoted as telling reporters in Vienna that freeze talks have already positively affected prices, but it was too early to say whether producers could decide on other actions in the future to stabilise prices.
“I hope it will be a successful meeting,” he said.
Participating oil producers realise the importance of reaching an agreement, said oil experts.
“The prospects of reaching an agreement are good because all producers from inside and outside Opec are feeling the pain and damage to their economies caused by the steep decline of crude oil prices,” said Salameh.
“Whatever name they may call it, the objective is to find a formula to cut production to bolster the oil prices,” Salameh responded to a question on freezing decision.
Mustaf Al Ansani, energy expert and researchers at Dammam-based Arab Petroleum Investments Corporation (APICORP) in Saudi Arabia, called Oil prices “unpredictable” and “despite many signals for cuts and freezing in production, there are obviously many variables that will continue to influence the prices,” he said.
APICORP is a multilateral development bank established in 1974 to foster the development of the Arab world’s oil and gas industries.
Overproduction and increasing amount of stockpiled crude oil are among the factors influencing the prices, Ansari told Gulf News.
According to energy organisations figures, the global oil supplies of 96 million barrels exceeds the demand by two million barrel a day.
“Every day you are seeing a substantial access of two million barrel … The market, at the moment, is over supplied. It has to be balanced first. The balance, according to most projections won’t happen before 2017 or early 2018,” added Al Ansari.
By then, the demand will increase and the stockpiles will be withdrawn, which will lead to a balance in the markets and a prices raise, he said.
Responding to a question on price reaction to any cut or freeze in crude production, Ansari said prices react differently. Sometimes, a whisper might disrupt the prices, and sometimes a physical change will not lead to any change.
What is important is that any decision has to be “collectively and realistically” to have an impact, Ansari said. “How much the cut is and for how long, these are important questions,” he said.
The size of the cuts is among the main obstacles in the way of reaching an agreement in Doha, said Salameh.
“The size of the cut should be at least 5% of the combined total production of Opec and Russia. Opec is currently producing 32.3 million bpd and Russia 11 million bpd, a total of 43.3 million bpd. A 5 per cent cut amounts to 2.165 million bpd. This is more than capable of absorbing the glut in the market,” he said.
“Provided members of Opec and Russia agree to cut production by at least 2 million bpd, the oil price could start to rise reaching within a few weeks to $60-$70/barrel. And once it has reached that level, then the momentum will take it further to beyond $80/barrel by early 2017,” Salameh believed.
However, the shale oil producers in the US say that once oil prices begin to raise about $40 a barrel, their production levels, which have slowed significantly in connection with the price of oil, could increase again. This added shale oil production could add to the global glut, meaning that Opec and Russia would have to further cut production to balance the market.
Continental Resources Inc, a US shale oil producer, said it is prepared to increase capital spending if US crude reaches the low- to mid-$40s range, allowing it to boost 2017 production by more than 10 per cent, chief financial official John Hart told media last month. US crude on Friday was trading at $39.09.
Salameh adds that Opec members will need to stick to any agreement they reach.
“However, this depends on all members of Opec abiding by the cuts. Opec members have a long history of cheating and overproducing above their production quotas. They were the ones who caused the glut in the market by producing 32.3 million bpd or 2.3 million bpd above the agreed production ceiling of 30 million bpd,” he said.
But meanwhile, one meeting is enough to push the prices up.
“One meeting is enough to declare their intention to cut production to bolster the oil prices. However, Opec members are planning to meet in June this year. This second meeting will give them the chance to stamp their seal of approval to any initial agreement reached in Doha, Qatar in April this year,” Salameh concluded.
