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Do the Opec production deal numbers add up?

Now the hard work begins.

The supply agreement agreed by Opec on Wednesday sent oil prices soaring above $50 a barrel but there are many reasons for caution, not least in making sure no one cheats and producers from outside the cartel also contribute.

While the deal looks straightforward, it is anything but and the devil is in the detail.

The conference documents released on Wednesday evening show Opec countries, except Libya and Nigeria, reducing production from the start of January by 1.2m barrels a day to 32.5m for an initial period of six months.

But extrapolating the numbers from the statement produces a production ceiling of 32.68m b/d, which is almost 200,000 b/d higher than the new target.

“The difference might come from production estimates from Nigeria and Libya,” says Tamas Varga of PVM, an oil brokerage.

Another number that stands out relates to Iran.

Because Tehran has spent years under sanctions, Opec agreed to award it an output baseline of 3.975m b/d — the highest pre-sanctions level it produced in 2005 — unlike most others whose baseline is what they pumped in October.

A 4.5 per cent reduction from this level arrives at almost 3.8m b/d, which delegates say is an average level at which it has finally agreed to freeze for six months from January. Iran’s current output is closer to 3.7m, which gives the country room for an increase of at least 90,000 in theory at least.

The reason for this fudge was to placate hardliners in Iran who wanted to make sure the country did not commit to any production cuts and meet demands from Saudi Arabia that Tehran had to be part of any deal. By using this convoluted formula, both sides can save face.

Analysts have also suggested Opec may have miscalculated due to Angola’s production target being derived from its output in a different month than other members.

It was agreed that, due to field maintenance affecting Angola’s output by about 200,000 b/d in October, the African country’s target would instead be based on what it produced the previous month. But Opec does not appear to have added the 200,000 production to its starting point.

But what has analysts scratching their heads is the production ceiling.

Even though Indonesia has been suspended from Opec, the country’s production of about 720,000 b/d is included in the new production ceiling of 32.5m b/d. So too is output from Nigeria and Libya, the countries which are exempt.

“The main flaw of the agreement remains that it exempts some countries from the cuts (Libya, Nigeria, Indonesia) but formulates a supply target that includes them,” says Olivier Jakob, of Petromatrix, a consultancy.

And here lies the main problem with the first part of the agreement. Unless militants blow up more pipelines in Nigeria or fighting flares up again in Libya, their production is likely to keep rising.

“Even if there is full compliance with the agreed cutbacks, actual total Opec output is likely to be above the 32.5m b/d target, because Opec has effectively underestimated likely output for Libya and Nigeria,” said FGE, an oil consultancy.

The other leg of Wednesday’s deal involves big non-Opec producers.

Russia says it will make half of the 600,000 b/d cut the cartel wants to see from non-Opec countries. Its energy minister Alexander Novak says the cuts will be gradual and all of Russia’s oil producers have agreed to participate.

Analysts, however, are sceptical over how much publicly listed companies like Rosneft and Lukoil will deliver. Moreover, it is not clear what baseline Russia will set its reduction against. If this is based on a projection for next year, it is not clear that any barrels will be leaving the market.

Equally, it is not clear where the other 300,000 b/d non-Opec cuts will come from. Kazakhstan and Oman have indicated some willingness to contribute, but details are sketchy.

So this part of the agreement also has its flaws and, overall, the deal announced on Wednesday does not guarantee a decline in global stocks next year.

“Non-cooperation from non-Opec, output increases from Libya and/or Nigeria or non-compliance from member counties will add to already brimming oil stocks,” says Mr Varga.

Nevertheless, a meaningful cut of supply beckons and that will speed up the rebalancing of the oil market after a savage two-year downturn. Saudi Arabia is going to cut production by 486,000 b/d, while a 300,000 b/d cut will come from its Gulf allies — the United Arab Emirates, Kuwait and Qatar.

It also sends a powerful message to oil market bears — Opec, an organisation that had been written off by many, is back. Indeed, less than 24 hours after the deal, Brent crude was up 2 per cent and approaching $53 a barrel.

Via FT