Daily Times

The committee to monitor the global agreement made by 24 nations to curb production held its fourth meeting this year on July 24 – this time in Russia, the largest oil producer on the planet.

The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC Joint Ministerial Monitoring Committee, known as JMMC, had surprised the market in every way. First, the market was expecting it to discuss deepening the cuts further in the face of rising supply from OPEC and elsewhere, and this didn’t happen. Second, the market was expecting JMMC to discuss putting a cap on Libya and Nigeria, and that didn’t happen either. Third, the agreement was focusing on monitoring production but the JMMC discussed ways to monitor exports as well. Finally, many producers hinted at exiting the deal by March, but the JMMC said that it will leave the option of going beyond March “open.”

So was this meeting successful? If the outcome of the meeting is measured by the impact it had on oil prices, then this meeting wasn’t very successful because oil prices were still fluctuating within the same band, despite the statement from Saudi Energy Minister Khalid Al-Falih that his country will deepen its cuts alone next month. But this meeting was successful to some extent on other fronts as it added more clarity to the market on what to expect and not to expect between now and the next OPEC ministerial meeting in November. At least the market now knows that Libya and Nigeria will not join the deal for some time and their output should be factored in. Also, the JMMC made it clear that Libya and Nigeria combined will not add more than 2.8 million barrels a day of oil until the deal expires next March. The Saudi energy minister stated publicly that the deal will face headwinds, and implied that it is not working as expected because of two reasons. First, many countries are not conforming very well to their pledged cuts, and second, the deal should include a mechanism to monitor exports in addition to production from participating countries.

The minister said in his opening remarks: “Exports have now become the key metric for financial markets, and we need to find a way to reconcile credible export data with production data and our monitoring mechanism.” Al-Falih also implied that he is concerned by the rise in Libyan and Nigerian production even though he supports the rise from these two countries.

“The other major issue that markets are focused on is the expansion of supplies from Nigeria and Libya, both of which have been exempted from our agreement, and of course we remain supportive of our partners in both of those nations as they work on the recovery of their industries and economies. The committee, however, should monitor the impact of such growth on global supply-demand balances,” he said in his opening remarks. Al-Falih’s concern about Libya and Nigeria is valid. These two countries produce light crude oil similar in quality to that produced by shale oil producers or to that of Brent. So any increase from Libya and Nigeria puts pressure on light crude prices, mainly West Texas Intermediate (WTI) and Brent, while any increase or decrease from other nations like Kuwait, Iraq and Iran will put pressure on Dubai and Oman oil prices because they are similar in quality.

But OPEC cannot do anything at the moment because Libya and Nigeria have every right to return to their normal levels that are defined by OPEC agreements, in this case 1.8 million barrels a day for Nigeria and 1.25 million barrels a day for Libya. So what can Saudi Arabia, the largest producer in OPEC and the group’s de facto leader, do to make this deal more successful? The Saudi energy minister decided to lead by example by deepening the Kingdom’s cuts in output and exports in August. Saudi Arabia will cut its exports by a million barrels a day from a year ago to 6.6 million barrels a day. The majority of these cuts are believed to be targeting the US market, where stockpiles are more visible than any other place on earth as they are measured weekly in a very transparent way. In “leading by example,” Al-Falih is showing again his unhappiness with the level of OPEC’s exports as he said in his speech that reported compliance is “not matching export figures.”

Looking at tanker-tracking data from a very reputable source, it is clear that exports in June were high despite the high conformity levels. OPEC’s crude exports in June averaged 25.19 million barrels a day, down by only 200,000 barrels a day from 25.39 million in January, when the deal started. Al-Falih knows that until OPEC meets again and reigns in production from Libya and Nigeria, there is no solution but to cut exports.

Published in Daily Times, July 31^st 2017.