So much for those much ballyhooed production cuts: After sixth month of the course OPEC and a group of outside petrostates charted to constrain their collective output to prop up oil prices, the cartel is seeing its own overall output numbers… increase! As the FT reports, Nigeria and Libya are to blame:
Libya and Nigeria contributed to a rise in Opec’s total production to 32.1m b/d from the prior month’s 31.8m b/d, according to the group’s monthly oil market report. […]
Although output in both Nigeria and Libya remains volatile due to political instability and violence, their combined production increased by more than 350,000 b/d last month, according to data from consultants and analysts submitted to Opec’s research arm. That amount is equal to more than a quarter of the supply curbs Opec has implemented in 2017 as part of a push to bring down excess stockpiles that have kept pressure on prices. […]
Both Nigeria and Libya have been exempt from the supply cut deal among global producer countries that came into effect in January and which ministers agreed in May to extend for another nine months.
Both OPEC members are currently producing well below peak volumes due to intra-country fighting and instability, and as such they’ve been exempted from the output constraints that are currently holding back the rest of the cartel’s countries.
But knowing the reasoning behind these exemptions and acceding that it makes a certain amount of sense doesn’t change the fact that, fresh off an agreement to extend these production cuts another nine months just a few weeks back, the oil cartel’s production has risen 300,000 barrels per day. This is hardly the sort of signal OPEC wants to send to the market—just the opposite, in fact. And as a result, oil prices have predictably stayed below $49 per barrel.
Still, if OPEC seems to have become vestigial recently, it isn’t because its own membership can’t keep the lid on production. (After all, that is a problem that the cartel has always had to contend with). No, the big difference these days is the surge in supplies coming from outside of OPEC, a major rise driven predominantly by U.S. shale producers, but one that can trace its roots all around the world.
We exist now in a new oil reality, one in which the efforts of regimes predicated on conventional crude production are finding their ability to exert control on the global market sharply diminished. This new reality is also one marked by cheaper crude, and in today’s market suppliers need to pay much closer attention to costs if they want to stay competitive. U.S. shale producers have proven themselves capable of adapting, and in the process they’re laying waste to the best laid plans of OPEC and its ilk.