JEDDAH: An agreement to curtail production by 24 of the world’s major oil producers to restore market balance and support prices is facing some headwind, as more supplies are hitting the market this year.
The 14 members of the Organization of the Petroleum Exporting Countries (OPEC) and 10 independent producers from outside the group lead by Russia, decided last month to extend for nine months an earlier deal to cut output by 1.8 million barrels per day (bpd), to help bring down global oil inventories to their normal levels.
Speaking to reporters on June 10 in Astana, Saudi Energy Minister Khalid Al-Falih said that the results of last month’s agreements to extend the global production cut would “materialize over weeks and months.” Al-Falih added that he is “convinced that the overall trend for the market is that of rebalancing.”
The agreement, however, failed to lift oil prices. West Texas Intermediate (WTI) prices closed down on June 9 for the third week in a row as rising supplies — from the US to Nigeria and Libya — show that the oil glut is lingering.
Oil prices fell about 4 percent last week after US data showed a surprise 3.3 million barrels rise in crude inventories to 513.2 million barrels. Al-Falih referred to this situation as a “statistical glitch,” saying that time will correct it in three to four months.
The US data, published by the Energy Information Administration (EIA) on June 7, also showed that US crude imports went up in the week ending June 2. Imports from Saudi Arabia fell to the lowest level since January 2015, while imports from Iraq surged to the highest level since 2012.
“There is a big question on the level of compliance by producers who are part of the cut agreement,” Abdulsamad Al-Awadhi, an analyst and a former national representative of Kuwait in OPEC, told Arab News. “Many ministers pledged to cut and adhere to cuts but the market is looking for effects of these pledges on the inventories, which are still high.”
To worsen the situation, crude oil exports from OPEC and non-OPEC members seem to be rising despite the deal to cut production, Morgan Stanley said in a report on June 8. Waterborne oil exports increased by 2.2 million bpd in May from April, and of that total non-OPEC countries accounted for around 1 million bpd, while OPEC countries accounted for another 1.2 million barrels with the majority of this coming from Libya, Nigeria and Iran, where production is not constrained by the cut deal.
Kazakhstan, where Al-Falih spoke, is another country that is part of the cut agreement but which plans to increase output this year.
The country’s giant oil field, Kashagan, is producing 200,000 bpd now and output will continue rising to reach 370,000 bpd by the end of this year as previously planned, Claudio Descalzi, CEO of the Rome-based energy giant Eni, was quoted as saying on June 10. The Kazakh energy minister said in May that Kashagan would probably miss its target of 370,000 bpd this year, as output was around 130,000-140,000 bpd at that time.
The International Energy Agency (IEA) said in its regular report last month that it expects the oil market to rebalance this year even as US supply is expected to increase. “This report confirms our recent message that rebalancing is essentially here and, in the short term at least, is accelerating,” the IEA report added.