When OPEC reconvenes on November 30, the group should be able to reach a deal to curb production without too much disagreement.
At least, that’s what OPEC’s Secretary-General Mohammed Barkindo believes will happen.
“We expect that all the building blocks will be in place in a timely fashion for implementation. I am optimistic we will have a decision,” he says.
Unfortunately, not every one shares in his enthusiasm.
Agreeing to cut current oil output to 32.5 million barrels a day from 33.24 million barrels a day was the “easy” part for OPEC the other month. The challenge now is to break those cuts down country-by-country and having each country agree with the new limitations.
However, unless the Saudis are ready to cut the lion’s share of output, such an agreement could be tough. Iraq – which is now pumping 4.7 million barrels a day, higher than 4.46 million barrel estimates, believes it should not be required to cut production.
OPEC already agreed that Libya and Nigeria should be exempt, even though both have increased their daily output by 220,000 and 300,000 barrels respectively.
Iran has steadily increased its production following sanctions, with a goal of four million barrels a day from 3.7 million in September.
Once we exclude Iraq, about a third of OPEC production is exempted.
There’s also stress for non-OPEC country participation, too.
Ironically, senior officials in Iran are urging non-OPEC countries to help stabilize the oil market and boost prices. “We hope the two sides will reach agreements and the non-OPEC states and Russia will accompany members of the organization.”
Yet, Iran isn’t ready to cut itself.
In addition, just weeks after Russia said it would join in on OPEC production cuts, a Russian envoy at OPEC has said, “output cuts aren’t an option for us,” as reported by Interfax.
Even Russia’s energy giant, Rosneft has already said it would not cap production. Instead, the company, which produces 40% of Russia’s oil and more than 5% globally, has said it will raise production above the 4.1 million barrels a day it produced in 2015.
The icing on the cake… or the final nail in the coffin
Despite a deal, OPEC increased production last month to the highest level in eight years. It also just increased its forecast for 2017 non-OPEC supply growth, which points to an even bigger oil surplus by next year. Also, instead of helping last month, OPEC pumped 33.39 million barrels, up 220,000 barrels from August.
Another issue is Britain’s Buzzard oilfield, the largest oilfield in the North Sea. It recently restarted production and will produce about 180,000 barrels a day.
In short, inventories around the world are at all-time highs.
While the anticipation of an OPEC deal helped fuel the 18% rally of crude oil to $52.22, OPEC’s failure has the potential to send oil significantly lower than $50 a barrel, near-term. In fact, some analysts believe prices could quickly drop by $8 to $10 a barrel, as reported by the Houston Chronicle.
Whatever may happen, it will not prevent us from finding deeply undervalued oil companies with great fundamentals for The Cheap Investor.