All eyes on Nigeria, Libya as OPEC meets

Members of oil cartel, OPEC, are meeting in St Petersburg, Russia today, Monday, July 23 with expectations that the cartel will be putting pressure on Nigeria and Libya to join a production cut agreement reached in May this year.
Both Nigeria and Libya had been exempted from the OPEC production cuts because their production had been below their OPEC quota, due to militant attacks on oil facilities. But since the agreement, both countries have seen a sharp rise in their production, due to a drop in militant attacks.
Nigeria has seen production cross two million barrels per day, while Libya production is approaching a million barrels per day, putting pressure on OPEC’s target of taking off 1.8 million barrels of crude from the international markets, in a bid to boost prices. Since the agreement was reached, crude oil prices have continued to struggle, staying largely below the US$50 per barrel mark.
Analysts have told CNBC that OPEC will likely recommend maintaining the policy of holding back output at current levels, but efforts will be made to bring Nigeria and Libya into the framework because of the recent unexpected return of their production.
Oil prices fell Friday, after a report that OPEC’s July supply could rise by 145,000 barrels over June, driving production above 33 million barrels per day. West Texas Intermediate crude futures fell 2.5 percent to $45.77 per barrel, and Brent was down 2.6 percent at $48.
“Clearly, OPEC has a lot of cracks,” said Francisco Blanch, head of commodities and derivatives strategy at Bank of America Merrill Lynch. “The cartel is certainly under a fair amount of pressure from members that feel they shouldn’t be cutting production here. I think the meeting is going to be more routine than anything else. There will be some recommendations.”
The fact that prices have fallen again and now languish under $50 is hurting OPEC producers. “Ecuador wants to pull out, and then Iraq has been talking about increasing output by a half million barrels,” Blanch said. Ecuador left the agreement and said it is raising production.
The monitoring committee meeting in St. Petersburg, Russia, includes Algeria, Kuwait, Russia, Venezuela and Oman, and other ministers from Saudi Arabia and elsewhere, could participate as observers, Blanch said.
“There’s been talk of a Saudi cut being thrown around. … I don’t think it’s very likely right now,” Blanch said. Saudi Arabia was already shouldering the biggest portion of OPEC’s cut, as its largest producer, but it has also previously said it would make room for Libyan and Nigerian output if necessary.
John Kilduff of Again Capital said there’s been speculation that Saudi Arabia could keep as much as 1 million barrels a day from the world market in August, a time of year when it normally keeps more crude at home for domestic use. “I think we’re set up for a ‘buy the rumor, sell the news’ type of market,” said John Kilduff of Again Capital.
“The only surprise to the market would be if the Saudis stood up and cut more,” said Kilduff. “But there doesn’t appear to be much appetite for further cuts.”
OPEC and other producers, such as Russia, have agreed to hold back 1.8 million barrels a day, but an initial jump in oil prices resulting from the accord, spurred more production from U.S. shale drillers and others. The U.S. industry has become increasingly more efficient, as it exploits new technologies, and it is expected to produce an average 9.3 million barrels a day this year, and 9.9 million barrels a day next year.
World oil supplies have remained stubbornly high, and even though supply has been drawing down in the U.S. and elsewhere, there’s still a lot of oil. Many analysts have brought down their price targets as crude prices fell and stayed stubbornly low. Blanch expects oil prices to remain between $45 and $50 per barrel this year.
Blanch said OPEC is boxed in. “They cannot get out of this one very easily. It’s either fast death, slow death or death by a thousand cuts. If they decide to break up the deal and increase production, it’s a fast death. If they keep the deal as it is, it’s a slow death. If they cut production and give away market share to U.S. shale, it’s a death by a thousand cuts,” Blanch said.