Posted by on October 23, 2016 2:58 pm
Tags: , , , , , , , , , , , , , , , ,
Categories: BOE Bond Crude Crude Oil Economy Iran Iraq Kazakhstan Kuwait Market Share Mexico Middle East Norway OPEC Poland Reuters Saudi Arabia Vladimir Putin

With just one month left until the OPEC Vienna meeting in which by some miracle, the cartel of oil producing countries, as well as non-OPEC countries are expected to agree on production cut quotas, things are not looking good. The latest complication emerged on Sunday when Iraq, which one month ago tipped its hand that it would not comply by the Algiers agreement, said it would maintain oil production at current levels after exceeding 4.7 million barrels a day in September, even as other OPEC members discuss limits on output.

As Bloomberg reports, and as we predicted in September, Iraq joined Libya, Iran and Nigeria in asking OPEC for an exemption from its participation in any cuts, Oil Minister Jabber Al-Luaibi said Sunday at a news conference in Baghdad. Ali al-Luaibi said on Sunday his country should be exempted from output restrictions as it was fighting a war with Islamic State. “We are fighting a vicious war against IS,” Luaibi said in e briefing for reporters, adding that Iraq should get the same exemption as Nigeria and Libya.

“We are with OPEC policy and OPEC unity,” Al-Luaibi said. “But this should not be at our expense.” Instead, it is looking like a cut, if any, will be entirely at the expense of Saudi production, which may be forced to cut 1mmbpd or more, should OPEC continue to see rising record monthly production.

Cited by Reuters, Falah al-Amiri, head of Iraq state oil marketer SOMO, said Iraq’s market share was compromised by the various wars it fought since the eighties.

Even more fascinating was Iraq’s stated expectations of what its true output should be: a whopping 9 million barrels per day, roughly double from where it is now!

We should be producing 9 million if it wasn’t for the wars.” He added that Iraq has “passed 4.7 million barrels a day” and made it quite clear that Iraq would certainly not cut production: “We are not going back. It’s a question of sovereignty.”

Iraq pumped 4.228 million barrels a day at fields under the control of the federal government in Baghdad, Deputy Oil Minister Fayyad Al-Nima said at the news conference. Production at fields operated by the semi-autonomous Kurdish government in northern Iraq stood at 546,000 barrels daily last month, Al-Nima said. Total exports were 3.871 million barrels a day in September, Al-Amri said. Iraq pumped a record 4.54 million barrels of oil a day last month, according to data compiled by Bloomberg.

Confirming that it is all a question of relative market share, and who gets to capture it at a time when Chinese demand is suddenly slowing down, al-Amiri said that “some countries took our market share,” he said stressing that this was why Iraq refused to cut back output. Luaibi said Iraq would make its case at OPEC “in a pleasant environment” to avoid tension; alas tension will not be avoided as with every passing day the tentative Algiers “production cut” agreement appears closer to disintegrating.

Iraq’s semi-ultimatum to the cartel comes as Saudi Arabia’s Minister of Energy and Industry Khalid Al-Falih is meeting Sunday in Riyadh with energy officials from Russia, Qatar, Kuwait, Bahrain and the United Arab Emirates for oil talks while OPEC tries to establish which members will reduce production, and by how much. Iraq, the second-biggest OPEC producer, is pumping close to record levels, adding to a glut of crude that caused prices to tumble over the last two years.

* * *

Meanwhile, confirming that Russia has virtually no intention of cutting or even freezing its production, was a fascinating op-ed by Rosneft head Igor Sechin in Italy’s Corriere Della Sera,  in which the Russian lays out very clearly, as he puts it, “what the purpose of the current price war is.”

I think that, in the first place, it is a ?ompetition for a market share. And Russia is not going to keep a low profile. It is commonly known that Rosneft has the lowest lifting costs: 2.1 USD/boe (excluding taxes and transportation costs), and we are rapidly increasing our share of the global oil market. Within 10 years (from 2005 to 2015) our share in the global oil and condensate production, according to IEA grew from 1.9% to 4.9% and further increased to 5.4% after the acquisition of Bashneft. Moreover, unlike some of competitors who boost their share through dumping, we expand our presence by establishing partner relations and setting up joint ventures with key oil consumers, that is, we are building global integrated chains.

Who is Sechin talking about when he accuses of dumping? For the answer we go back one year ago to a Bloomberg article quoting the the Russian CEO in October 2015:

As President Vladimir Putin tries to restore Russia as a major player in the Middle East, Saudi Arabia is starting to attack on Russia’s traditional stomping ground by supplying lower-priced crude oil to Poland.

At a recent investment forum, Igor Sechin, chief executive of Rosneft, Russia’s biggest oil company, complained about the Saudis’ entry into the Polish market. “They’re dumping actively,” he said. Other Russian oil executives are worried, too. “Isn’t this move a first step toward a redivision of Western markets?” Nikolai Rubchenkov, an executive at Tatneft, said at an oil roundtable Thursday. “Shouldn’t the government’s energy strategy contain some measures to safeguard Russia’s interests in its existing Western markets?”

European traders and refiners confirm that Saudi Arabia has been offering its oil at significant discounts, making it more attractive than Russian crude. And, even though most eastern European refineries are now technologically dependent on the Russian crude mix, Russia’s oilmen are right to be worried.

While they have every right to be worried, they also have every right to defend their market share gained in recent months, which means even more production cuts will be demanded out of the Saudis if they hope to truly implement production cuts, something which however appears to have been simply a ruse to allow Riyadh to sell its $17.5 billion bond deal quickly, taking advantage of $50+ oil prices, which however appear set to crack just one month from now when the Vienna meeting concludes with no production cut deal.

* * *

Finally, for all the confused oil bulls (and algos), here is an attempt at laying out the odds of an OPEC production cut from the perspective of 4 key producers.

  1. Nigeria National Petroleum Corp. lowered by at least $1 a barrel its official selling prices, or OSPs, for 20 out of 26 oil grades, according to pricing lists. Qua Iboe, Nigeria’s largest export crude under normal circumstances, was reduced by the most since 2014. The price reductions are due to a “huge cargo overhang” as the country attempts to regain market share, Mele Kyari, group general manager for the oil-marketing division at NNPC, the state oil company, said by phone. (Source: Bloomberg, 20 October 2016)
  2. Iran, OPEC’s third-biggest member, plans to boost its oil output to 4 million barrels a day this year, potentially complicating the producer group’s plan to cut supply in an effort to prop up prices.
    Oil Minister Bijan Namdar Zanganeh said he hopes the Organization of Petroleum Exporting Countries will agree next month at a meeting in Vienna to limit output. “We should decide in November how much every country should produce,” Zanganeh said. He didn’t comment on Iran’s participation, if any, in the OPEC agreement.
  3. Al-Naimi (Saudi Oil Minister until May 2016) writes in the book that one of his aides asked him in November 2014 what was the chance of leading non-OPEC countries Russia, Mexico, Kazakhstan and Norway cutting oil production. “I held up my right hand and made the sign for zero,” he writes. (Source: Bloomberg, 17 October 2016)
  4. In early October, Sechin told reporters that Rosneft planned this year to raise its oil production, already the world’s largest among listed producers, above the 203 million tonnes (4.1 million barrels per day) it produced in 2015. Sechin said he doubted some OPEC countries, such as Iran, Saudi Arabia and Venezuela, would cut their output either: “Try to answer this question yourself: would Iran, Saudi Arabia or Venezuela cut their production?”

Still think an OPEC production cut deal is imminent? Then we have a bridges in Saudi Arabia for sale to the highest bidder.

Leave a Reply

Your email address will not be published. Required fields are marked *