US oil production has turned a corner after a long period of weak petroleum prices, the government said, with volumes rising for the first time since early 2015.
The Energy Information Administration forecast that oil output from the US will increase 1.3 per cent to 9m barrels per day in 2017, abandoning an earlier prediction of a 0.9 per cent fall.
In the first forecast for 2018 in its monthly Short-Term Energy Outlook, the statistical agency said US crude production will rise another 3.3 per cent, or 300,000 b/d, to 9.3m b/d. Production hit bottom last September, EIA said.
“The general decline in US crude oil production that began almost two years ago is likely over, as higher average oil prices and improvements in drilling efficiency are giving a boost to output,” said Adam Sieminski, the EIA’s administrator.
Ten days ago, we reported that as a result of Obama’s vow to extend the Iran Sanctions Act for another 10 years, Iran threatened to retaliate, saying it violated last year’s deal with six major powers that curbed its nuclear program.
While US officials said the ISA’s renewal would not infringe on Obama’s landmark nuclear agreement (which may or may not be voided by Trump), and under which Iran agreed to limit its sensitive atomic activity in return for the lifting of international financial sanctions that harmed its oil-based economy, senior Iranian officials took odds with that view. Iran’s nuclear energy chief, Ali Akbar Salehi, who played a central role in reaching the nuclear deal, described the extension as a “clear violation” if implemented.
“We are closely monitoring developments,” state TV quoted Salehi as saying. “If they implement the ISA, Iran will take action accordingly.” Iran’s most powerful authority, the Supreme Leader Ayatollah Ali Khamenei, warned in November that an extension of U.S. sanction would be viewed in Tehran as a violation of the nuclear accord.
To be sure, that was merely jawboning by Iran, which has far less leverage and far more to lose if it antagonizes Washington and provokes the US into reimposing sanctions upon the Gulf nation, amounting to the tune of over 1 million barrels per day in foregone oil exports that would be taken offline, should the US impose similar sanctions as those which took the country’s crude export production largely offline in the 2013-2015 timeframe.
It is also the lesser of Iran’s worries: a far bigger concern is whether Trump will tear up Obama’s landmark nuclear agreement.
The global oil market has witnessed a serious challenge of imbalance and volatility pressured mainly from the supply side. It has led to significant investment cuts in the oil industry, which has a direct impact on offsetting the natural depletion of reservoirs and in ensuring security of supply to producers.
Current market conditions are counterproductive and damaging to both producers and consumers, it is neither sustainable nor conducive in the medium- to long-term. It threatens the economies of producing nations, hinders critical industry investments, jeopardizes energy security to meet growing world energy demand, and challenges oil market stability as a whole.
There is a firm and common ground that continuous collaborative efforts among producers, both within and outside OPEC, would complement the market in restoring a global oil demand and supply balance, in particular the drawdown in the stocks overhang, which is currently at a very high level.
At this conjuncture, it is foremost to reaffirm OPEC’s continued commitment to stable markets, mutual interests of producing nations, the efficient, economic and secure supply to consumers, and a fair return on invested capital.
Consequently, the recovery of oil market balance could be addressed through dialogue and cooperation among producing countries as a way forward for cohesive, credible, and effective action and implementation. Hence, it is under the principles of good faith that countries participating in today’s meeting agree to commit themselves to the following actions:
While the market has taken the latest round of “optimistic” jawboning by OPEC members in stride, sending crude higher by 4% ahead of next week’s OPEC meeting in Vienna where the terms of the OPEC production cut are expected to be finalized, the reality is that a favorable outcome may be problematic.
As Bloomberg’s Julian Lee explained overnight, “OPEC says it’s close to a deal to cut oil output for the first time since 2008, a move that may halt a 2 1/2-year price slump. The actions of individual member states tell a different story. The simple math supporting cuts looked solid at OPEC’s meetings in June and December. Prices then were way below most members’ fiscal break-even points. An output cut now of 1.5 million barrels a day, or 5 percent, would need to boost the oil price by only $2.50 a barrel for OPEC nations collectively to be better off. A $5 price increase would boost the value of what they pump by about $100 million a day.”
There are various nuances as to why a deal, one in which Saudi Arabia would bear the brunt of total production cuts, but as Lee notes, while OPEC Secretary-General Mohammed Barkindo has been touring member nations to shore up support for an agreement before the Nov. 30 meeting, culminating with a trip to Doha for talks last week, “the meeting didn’t resolve much. It certainly didn’t tackle any of the thorniest questions that OPEC must still overcome if coordinated measures are to happen.”
“The road from the OPEC agreement in Algiers to the next official OPEC meeting in Vienna is long and bumpy,” said Harry Tchilinguirian, head of commodities strategy at BNP Paribas SA in London.
The report stressed that oil prices were volatile and highly dependent on a variety of factors, including Brexit contributing to the general uncertainty and risk aversion or economic slowdown in Russia and China.
“Oil prices are assumed to average $43 a barrel in 2016 and $51 a barrel in 2017. Over the medium term, any further oil price recovery is expected to be limited, with futures markets suggesting prices will remain below $60 by 2021,” the report detailing the oil market forecast and its influence on the Middle East, North Africa, Afghanistan, and Pakistan said. In a recent effort to revitalize oil demand, Organization of the Petroleum Exporting Countries (OPEC) members reached an agreement on oil production freeze scheduled for finalization at OPEC summit on November 30, with non-OPEC states, including Russia, open to also capping the output.
India has imported the first parcel of Iranian oil to partly fill the underground strategic oil storage it has built at Mangalore.
“Mangalore Refinery and Petrochemicals Ltd (MRPL) received the first parcel of crude oil for delivery into the Mangalore cavern of Indian Strategic Petroleum Reserves Ltd (ISPRL),” the company said in a statement.
The first parcel of 260,000 tonnes of Iran Mix crude was received in very large crude carrier (VLCC), MT DINO.
The crude is being pumped into the underground Mangalore cavern for testing the facilities, it said. To ensure energy security, India has built 5.33 million tonnes of strategic crude oil storages at Vishakhapatnam, Mangalore and Padur (Near Udupi) in Karnataka.“These strategic storages would serve as a cushion during any external supply disruptions,” the statement said. “The strategic crude oil storage facilities are being managed by ISPRL, a special purpose vehicle,” it said.
Vishakhapatnam facility with a capacity to store 1.33 million tons was commissioned in June last year. “Mangalore facility with capacity of 1.5 million tonnes has started receiving crude today for testing the facility,” the statement said, adding the Padur facility is expected to be ready soon.
While historically the major conflict within OPEC in recent years had been between Iran, whose oil production had been mothballed since 2013 as a result of the US embargo and which is now eager to regain its roughly 4mmbpd in production, and Saudi Arabia, which successfully picked up market share from Iran, a new source of contention within OPEC emerged last night when Iraq disagreed with OPEC’s method of production estimates as reported last night.
And now it appears that Iraq – which in August produced between 4.4mmbpd and 4.6mmbpd depending on whose estimates are used, will not be easily placated. As Reuters details, Iraq, which overtook Iran as the group’s second-largest producer several years ago but kept its OPEC agenda fairly low-profile, on Wednesday finally made its presence felt. “What it did, however, pleased neither Saudi Arabia nor Iran.”
Iraq’s new oil minister Jabar Ali al-Luaibi told his Saudi and Iranian counterparts, Khalid al-Falih and Bijan Zanganeh, in a closed-door gathering in Algiers that “it was an OPEC meeting for all ministers”, a source briefed on the talks said. Luaibi, it turns out, is also the key OPEC member who “didn’t like the idea of re-establishing OPEC’s output ceiling at 32.5 million barrels per day (bpd), according to OPEC sources.”
Continuing the point made first yesterday, Luaibi told the meeting that the new 32.5 mmbpd ceiling was no good for Baghdad as OPEC had underestimated Iraq’s production, which has soared in recent years.
Confusion followed, according to Reuters sources, and after a debate OPEC chose to impose a ceiling in the range of 32.5-33.0 million bpd – a decision dismissed by many analysts as weak and non-binding. OPEC’s current output stands at 33.24 million bpd.
The Organization of the Petroleum Exporting Countries (OPEC) is planning a series of oil market stress tests and the Wednesday decision on the oil output freeze is just the start of that process, former US Assistant Secretary for Fossil Energy Charles McConnell told RIA Novosti.
“I believe that if there is a sustained lift in prices there may be another cut in output. This may be counter-intuitive but it is part of the experiment,” McConnell, who is currently the Executive Director of the Energy and Environment Initiative at Rice University, said. On Wednesday, the OPEC states reached an agreement to freeze daily oil output for the whole organization. The commitment date of oil output freeze will be presented at the cartel’s upcoming meeting in November. “If prices go back down, there will likely be pressure to increase production…… They must run market tests and I believe this is the first of a series of tests we will see,” McConnell said.
According to the former US Assistant Secretary of Energy the stress tests will continue over the next 12 months.
“Volume of oil produced at lifting costs that are much better than anywhere else in the world is only maximized when the next available barrel to replace production causes prices to rise. It has risen short term, but 5% is not a large amount,” McConnell explained saying that OPEC countries are now “looking at their cost positions and profit margins and doing the optimization analysis.” On Wednesday, OPEC decided to establish a technical committee to study a mechanism of sharing oil production between individual countries.
Iran is taking a hard line as talks between big oil producers are set to get under way in Algiers.
Rather than targeting an outright level of production, Iran wants to regain lost market share before it joins any agreement to limit supplies, according to Iranian oil sources.
Tehran wants around 13 per cent share of any new Opec output ceiling. Based on the cartel’s current production that would translate to around 4.2m barrels a day – around 400,000 b/d more than Iran currently claims to be pumping.
Such a demand will be difficult for Saudi Arabia to accept. The Opec kingpin wants Iran to cap its oil output at 3.6m barrels a day, the level analysts say it produced in August, in exchange for other big producers cutting their production.
Opec members and other big oil producers are meeting on the sidelines of the International Energy Forum in Algeria. An informal meeting of Opec ministers is scheduled to take place on Wednesday.
Hopes of a deal are fading, although there could still be a surprise.
Minister says production is at 3.8 million barrels per day
Iran has long said it wouldn’t consider a production freeze until it had regained its pre-sanctions output level.
At a conference in Norway, Deputy minister for industry, mining and trade Moazami said the country is currently producing 3.8 million barrels per day. That’s up from 3.6mbpd in the latest OPEC data.
Iran’s production hasn’t been above 4mbpd since the 1970s.
What might give Iran more room to continue expanding production is that some officials say they need to reclaim ‘market share’. Given that overall global production has risen since the pre-sanctions era, that might give them more space to ramp.