OPEC nations grapple with oversupply of oil

AP – The world may be heading for an even greater oversupply of oil, and that possibility — which could drive down fuel and energy prices — is hanging over members of the Organization of the Petroleum Exporting Countries (OPEC) as they head into negotiations today.

The oil-producing nations will decide whether to stick with production cuts they’ve endured for the past three years, relax them or deepen them in the hopes of propping up prices.

They’re negotiating through a tangle of tensions driving members in competing directions.

Saudi Aramco’s stock market debut, which is expected tomorrow, has put Saudi Arabia in a precarious position as it bets on what volume of oil production will hit a sweet spot for prices, with the added pressure of considering the interests of the state-run oil giant’s shareholders. The nation is already bearing the burden of the largest share of OPEC’s production cuts.

But some nations such as Iraq have been ignoring the agreement and producing more than their allotted amount.

File photo of wetlands are seen beyond the Shell Norco refinery in Norco, Louisiana. PHOTO: AP

“If people are already not complying to the current agreement, what’s the point to those that are complying cutting more? So the others can go on cheating?” said Executive Director of global oil at research group IHS Markit Bhushan Bahree. “I think the Saudi position is they’re willing to cut more if needed, but they want better compliance.”

Brent crude oil hovered around USD61 per barrel yesterday afternoon. Prices have fluctuated throughout the year, reaching nearly USD75 per barrel in April after United States (US) sanctions on Iran and Venezuela limited world supply, but lingering trade tensions between the US and China dampened economic expectations, pushing prices back down.

West Texas Intermediate, the US benchmark crude, was trading at around USD56 yesterday afternoon, and its price followed a similar trajectory throughout the year.

As it stands, OPEC nations have agreed to cut production by 1.2 million barrels per day through March 2020, and most analysts expect OPEC nations to extend those production cuts until at least summer.

“If they just keep the existing situation, then you get this massive oversupply,” said Managing Director at Clearview Energy Partners Jacques Rousseau. Rousseau believes OPEC nations will cut production by an additional 400,000 barrels per day to keep supply and demand in balance during the first half of next year, with the cuts made mainly by Kuwait, Saudi Arabia and the United Arab Emirates. But substantial cuts may be difficult to achieve with some OPEC members following their own agendas.

“Iraq has exceeded its production target every month this year,” Rousseau said. “Granted, there’s some unrest going on in the country, but I don’t think they’ll voluntarily reduce.”

Meanwhile, Russia, which is not part of OPEC but has been following its lead on production limits in recent years, has indicated it wants its oil production re-calculated in a way that’s in line with OPEC nations. That could enable it to produce more oil.

And even if members of the cartel cut production, there’s more oil coming online from non-OPEC nations including the US, Canada, Brazil, Norway and Guyana, which will more than make up for any drop in production, according to IHS Markit. The dynamic to watch will be whether Russia and Saudi Arabia will come to an agreement on production levels in the early and middle parts of next year, said Heather Heldman, managing partner at Luminae Group, a geopolitical intelligence firm.

“If something goes awry with Saudi production in the next few months, and there’s a fairly good chance something will happen … Russia’s going to be the first party looking to fill that gap,” Heldman said. “And I think the Saudis know that.”