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Opinion
July 21, 2017 www.intellinews.com I Page 19
The reason why the agreement is no longer work- ing is because US shale producers also benefited from the deal. The higher price plus improve- ments in technology and extraction methods
have allowed the US industry to add over 800,000 barrels to daily production (bbl/d) since the low point of late 2016. According to data from the International Energy Agency (IEA), US oil produc- tion averaged 13.1mn bbl/d in June and looks set to either continue building on that volume or, at least, holding it.
In addition, both Libya and Nigeria – two countries that were exempted from the November deal be- cause of war disruption – have started to rebuild. Libya produced 820,000 bbl/d in June and is in track to reach 1.0mn by end summer. Its Novem- ber benchmark was set at 510,000 bbl/d. Nigerian output averaged 1.35mn bbl/d in Q1 but was at 1.6mn bbl/d in June.
Faced again with losing market share, Opec discipline is starting to break down. It is reported that while the Opec countries that signed up to the November deal, and the extension to spring next year, are generally in compliance with production, many are starting to export crude from storage. Hence there is a actually only a small cut in available global supply and that, despite the steady rise in demand, is one reason why oil inventories around the world are sticking close to record highs.
Russia is hosting a meeting with several Opec states in St Petersburg on July 24 to discuss how to stop the oil price falling. In reality there is noth- ing that any of the countries at that meeting will be willing to do. They are firmly wedged between the proverbial rock and hard place. If they agree to cut additional production, i.e. the only action which might boost the price of oil back to the mid $50s, then US output growth may well accelerate and Opec and Russia will lose even more market share and faster. One cannot imagine any of them wanting to do a favour for the US industry.
On the other hand they could do nothing and ac- cept another period of lower prices in the hope that there will also be a repeat of the drop in US output seen in 2015 and 2016, i.e. as marginal fields become uneconomic. But that would be also very financially painful for Opec states and Saudi Arabia in particular. Recall that the newly appointed Crown Prince Mohammed bin Salam has partially staked his credibility at home on a successful Aramco IPO in 2018. The valuation targeted is predicated on mid-$50 oil and hardly works at sub-$50 oil.
In reality, Russia is in a relatively good position, even though the international investment funds will pile more punishment on the equity indices with weaker oil. Unlike the Opec states, Moscow bit the bullet early on and allowed the ruble to free-float with weaker oil. We now know that the ruble will not be allowed to appreciate should something unexpected happen, e.g. a major dis- ruption in the Venezuelan oil industry, and drive the price of oil higher. A weak ruble exchange rate is accepted by Putin as key to his localisation recovery strategy. But if oil continues to slide the ruble will go right along with it. The weaker cur- rency to a great extent offsets the drop in the oil price for both the Russian oil operators and the federal budget.
At the St Petersburg meeting on July 24th Rus- sian officials will actually be in a much better position than their Opec counterparts. That is because both the budget and the oil producers have the weaker ruble safety net to offset any oil price weakness. Undoubtedly they will offer their Opec guests teas and sympathy at the event but the best advice they could offer is to tell the likes of Saudi Arabia, UAE and others to take a hit on their currency exchange rates. A big one-off de- valuation would provide useful compensation for the weaker oil price. Painful as that action might be for many of the Opec states, the alternative of lower oil revenues and an uncompetitive currency would be a whole lot worse.