A worker at the Lukoil company owned Imilorskoye oil field in Kogalym, Russia. Experts say political differences between the two oil producing giants on several issues have been hindering an agreement. Image Credit: Reuters

Dubai: If global oil prices hope to recover from the current crash, an immediate cut in global production ranging between 2 to 3 million barrels a day of oil is needed, experts say.

Currently, the market is so volatile that any news of an agreement between Opec and non-Opec oil producing members, such as the comment from the UAE’s Energy Minister Suhail Mohammad Al Mazroui last Thursday, can affect prices. On Friday, Brent oil prices jumped 10.98 per cent to $33.36 (Dh122.43) a barrel following Al Mazroui’s comments that a deal between Opec and Russia was being discussed. By comparison, last week, prices dropped below $28. However, experts added that political differences between the two oil producing giants on several issues have been hindering the reaching of an agreement.

Estimates on just how much would need to cut vary widely.

“Cutting Opec production by 2.2 million barrels a day could see prices rising to $60-$70/barrel in less than two weeks,” said Mamdouh G. Salameh, an international oil economist based in London.

Two weeks after the initial news that Russia and Saudi Arabia were working on an agreement to cut production by 5 per cent oil prices were pushed up by 29 per cent from $28 per barrel to $36 per barrel, Salameh points out. He said “the main obstacle is mistrust between Saudi Arabia and Russia. Russia says Opec members caused the glut in the market so it is up to them to cut production first. Russia has committed itself to match [an] Opec cut by cutting its own production by 500,000 barrels a day (b/d),” Salameh said.

“Can you then imagine what the price jump would be if Opec announced a cut of 2.2 mbd. The price would jump to between $60 to $70.”

However, other analysts point out that just a jump would be unsustainable, due to US shale oil. A boom in shale oil in 2014 caused prices to drop from $115 in June of 2014 into the $30s in January of 2015, although prices recovered to $60 later that year. The fall in prices were halted largely due to shale’s own success. Rating agency S&P says it expects the average price of global benchmark Brent crude to be around $40 per barrel.

American shale oil

“With low oil prices, the cost of extracting shale oil became too expensive,” said Ahmad Al Najjar, a Cairo-based economist, who points out that raising prices could result in another rush of American shale oil into the market.

“The US [as an administration] is relieved with the low oil prices,” said Najjar. “It is buying oil at low prices and is keeping the shale oil in its reserves. However, it is the American companies that are hit by the low oil prices,” he told Gulf News in an interview. “Especially those companies that have agreement and deals with other producing countries”.

Jodie Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones Indices, believes that any price recovery will depends on inventory levels, could take another two years to erase even with a production cut agreement between Russia and Opec.

“Though sometimes, like in the global financial crisis, the demand isn’t strong enough to help [and] the shortage persists, the recovery takes much longer. It is possible inventories could take double the time now to recover from the severity of the oversupply. If this is the case, it is hard to see how the oil price itself forms, for example, it is now over seven years from oil’s high in July 2008 and it still is in a downtrend, despite an interim comeback where the price doubled from February 2009 — April 2011,” she added.

Naturally, it takes time for the glut to disappear but once prices start to rise, they develop their own inertia.

“Always remember that oil is like a coin: one side is economics and the other is geopolitics and these two sides are inseparable,” Salameh said.

Global impact

Last January, oil prices hit their lowest levels since 2003 when they reached $27 per barrel. They slightly recovered, but they are still under $35.00 per barrel. The crash in prices has hit oil producers globally, with bond defaults and bankruptcies hitting US oil companies and Gulf nations forced to adjust budgets to deal with falling revenue. To boost revenues, many Gulf countries have cut energy subsidies and VAT (value added tax) is expected to be introduced in 2017.

Apart from reaching an agreement between Opec and non-Opec countries, oil prices could go up if Opec members agree to cut their production, or even non-Opec producers cut their production, said Jodie Gunzberg,

“It doesn’t really matter who initiates it [cut] but bigger and more stable producers are likely to have a greater impact in the recovery,” she told Gulf News in a statement.

“However, it is difficult to coordinate since there is a mix of government, privately and publicly owned companies involved in oil production. Saudi Arabia is the largest Opec oil producer, and the Americas and former USSR have the biggest non-Opec production share,” she added.

Saudi Arabia, which produces 11.75 million barrel a day, produces nearly 13.24 per cent of all the oil produced daily in the entire world. The US sits at second place with production equal to 12 per cent of the total global production. The US recently overtook Russia to take the number two position, thanks to a shale oil boom, a primary reason for the current glut in the market. Russia now in the third position globally produces over 10.3 million barrels per day, nearly 12 per cent of world production.

Proportionate production

However, Salameh believed it is mainly Opec members that should cut their production.

“Saudi Arabia and all Opec members should reduce their production proportionately,” added Salameh, who is a member of several international oil and energy organisations.

Saudi Arabia is the biggest producer and exporter in Opec, hence its approval to any decision is crucial, he pointed out.

Also, “it [Saudi] accounts for the biggest increase in production in Opec followed by Iraq,” he added in an email interview with Gulf News.

“It is OPEC’s responsibility since its members, and not US shale oil production, caused the glut in the market by producing 2.2 million barrel per day above their agreed production ceiling of 30 million barrel per day.” Production caps have since been removed following the last Opec meeting in November.

Commenting on the lack of action so far, Salameh said “because Saudi Arabia will not cut production under the pretext of defending its market share nor will it let Opec do so.” Opec officially started its policy of defending market share in November of 2014.

“Saudi oil strategy has four objectives. The first is defending its market share against Opec rivals like Iraq and Iran and non-Opec rivals like Russia and Shale oil. The second is pre-empting Iraq’s and Iran’s future demand for bigger production quotas within Opec. This can only be achieved if Saudi Arabia reduced its own production to accommodate Iran & Iraq, something the Saudis refuse to do,” Salameh said.

“The third objective is waging an oil war to undermine Iran’s economy in its undeclared war on Iran because of its nuclear programme and its involvement in Syria. The fourth objective is to slow down if not undermine US shale oil production,” he added.

New realities

But other experts expressed a different view. They believe up to three million barrel a day and from all parties, inside and outside of Opec.

“There are nearly a surplus of 3 million barrels a day in the markets, and it will be difficult to correct the situation because of the new realities on the ground,” Al Najjar said from Cairo

“You need a huge effort to change these realities,” he added when speaking to Gulf News.

“The world is realising now that high dependence on oil is withdrawing,” said Najjar. “Now, the biggest car companies are making electric cars … also, the electrical power production from solar energy is becoming more and more of a moderate cost.”