OPEC’s surprise announcement on Wednesday of a preliminary output reduction agreement seemed to be the development the oil and gas sector had been waiting for. By the middle of Thursday afternoon GMT, stock prices were dramatically up for drillers and E&P companies following Brent’s 6% rise in Wednesday’s session. The Saudis and Iranians had seemingly put aside their differences for the benefit of the entire industry.
Reading past the headlines, however, it becomes obvious there are massive challenges facing such a move to cut production. Firstly, Iraq’s delegation is hotly disputing OPEC’s estimate for its crude production. This becomes apparent when looking at OPEC’s MOMR data against the equivalent Iraqi Ministry of Oil numbers. The Vienna-based cartel is estimating Iraq’s August crude output at 4.35 million bpd, over 300 000 bpd less than Baghdad’s 4.62 million bpd. Therefore, any shared OPEC strategic output cut would hurt Iraq considerably more than the country is prepared for.
Secondly, the real numbers behind the output reduction are significantly larger than face value. Whilst OPEC is estimating its current production at 33.24 million bpd and is proposing to cut production to as low as 32.5 million bpd, the actual reduction is likely to be higher than the implied 724 000 bpd d. Douglas-Westwood (DW) estimates developments due to be brought onstream across all 14 OPEC members before the end of next year would push production up to 33.62 million bpd, meaning the alliance must dig much deeper than the reported numbers suggest. Some of these developments, including the expansions of Saudi Arabia’s Shaybah and UAE’s Upper Zakum are extremely close to completion – will their inauguration be postponed until market conditions are more favourable?
OPEC now faces a huge challenge. Assuming the quota is held at 32.5 - 33.0 million bpd, DW estimates the cartel will effectively have to ‘hold back’ at least 1.5 million bpd of production by 2018 in order to stick to its self-imposed limits.
Authored by: Matt Cook, Douglas-Westwood London
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