A view of the OPEC building in Vienna (file). Most Opec producers have to focus on raising production in order to maximise revenues.
By Pratap John/Chief Business Reporter
Opec producers may find difficulty cutting output in response to receding supply disruptions since member countries except Qatar, Kuwait, the UAE, and Saudi Arabia have fiscal deficits, says a new report.
According to Bank of America Merrill Lynch (BoAML) that situation would leave the markets depending on Saudi Arabia to “bear the responsibility of balancing global oil markets.”
Most Opec producers, the report said, have to focus on raising production in order to maximise revenues. Facing a myriad of problems, including limited access to foreign capital, government funding issues, collapsing currencies or unstable political systems, several Opec countries depend heavily on oil revenues.
“Rising fiscal budgets in the wake of the Arab Spring have only exacerbated these challenges,” BoAML said.
In Libya, the recent start-up of the 340,000 bpd El Sharara field, where protests lasted for 90 days, brought output back up to 600,000 bpd. That is up from 250,000 bpd at the end of last year, but remains far below post-civil war highs of 1.4mn bpd. Significant risks remain and protesters just threatened to shut the field again if their demands were not met by the government. Tensions remain high, as attempts by the Cyrenaica separatist movement in the east to sell regional crude oil have been met with threats of force by the central government, the report said.
Moreover, it is not exactly clear whether the protest movement demands a higher share of oil revenues or effective control of some oil assets.
While entirely hypothetical at this stage, a partial or full return of production in both countries requires a synchronised response from other Opec members to cut back. Most of the heavy lifting in terms of absorbing the supply losses was done by Saudi Arabia, which saw a big step-level increase in production.
Since mid-2011, production averaged 9.7mn bpd compared with 8.8mn bpd from 2003 to 2010.
2011 saw the strongest rate of output growth since 1991, of 1.2mn bpd with 2012 adding further to supplies before moderating slightly in 2013, the report said.
Monthly output exceeded 10mn bpd on six separate occasions since November 2011. As worker strikes and civil unrest sent Libyan output plunging again in 2013, Saudi Arabia once again reacted quickly.
It remains to be seen whether Saudi Arabia cuts back if output returns in the “disruption countries,” the BoAML report said.
In 2012, a recovery in Libyan output led Saudi Arabia to cut output down to as low as 9.2mn bpd in December from 10.1mn bpd in June. This was one of the four times since the 1990s that Saudi took out 1mn bpd of supply or more in less than six months.
However, the most Saudi Arabia ever cut back within a year was 1.5mn bpd, which paled in comparison to a theoretical full return of Libya and Iran of 2.4mn bpd.
Meanwhile, it is unlikely that other Opec members would willingly cut back, as most of them are fighting output losses. Nigeria has long struggled to deal with oil infrastructure sabotage and theft, and disruptions picked up in 2013, leading to several force majeure and pipelines disruptions. Monthly output surpassed the 2mn bpd mark only once last year.
Production in Angola and Algeria also declined in 2013, with the latter seeing particularly heavy declines over the last few months, despite the start-up of the new El Merk field.
Even in Venezuela, production has been falling since August, as new heavy oil projects in the Orinoco Belt have failed to keep output steady.
Kuwait and the UAE increased production in 2013, but even their gains were muted (65,000 bpd and 50,000 bpd year-on-year, respectively).
Output in both countries has been rising steadily since 2009, given the focus on enhancing oil recovery rates at existing fields.
“We expect UAE production to find some support going forward, given the start-up of the Qusawirah field in late 2013. More importantly, production out of Iraq, currently not obliged by output quotas, is expected to increase this year, as major projects are ramping up. This makes Saudi’s burden of cutting back even more difficult,” BoAML said.
Outages trim production to below 2014 demand
Opec has lowered its oil output further and is pumping less than this year’s global need for its crude, the exporter group said yesterday, underlining the toll that outages in Libya and elsewhere are taking on production.
The monthly report from the Organisation of the Petroleum Exporting Countries kept unchanged its global supply and demand forecasts, which point to a smaller market share for Opec in 2014 due to increasing supply from non-Opec countries.
But Opec, which pumps a third of the world’s oil, is relatively upbeat on economic prospects, seeing faster growth in 2014 of 3.5%, up from 2.9% in 2013 as monetary stimulus continues.
“Further advances throughout the year could be possible, but some downside risk remains,” said the report by economists at Opec’s headquarters in Vienna.
For now, Opec expects demand for its crude oil in 2014 to average 29.58mn bpd, virtually unchanged from the previous estimate.
According to secondary sources cited by the report, Opec lowered its own output to 29.44mn bpd in December, below this year’s forecast demand.
This suggests there will no surplus crude in the market in 2014 should Opec keep output at December’s rate, although that is unlikely should output recover in Iraq, Libya and Iran.
Already in 2014, Libya’s output has partly recovered after being curbed for months by protests and strikes and Iran’s deal with Western powers over its nuclear programme has raised the prospect of higher oil exports.
Rising output would require output cuts from top Opec exporter Saudi Arabia, say analysts. Riyadh pumped at a record rate above 10mn bpd in 2013 to compensate for outages and has since throttled back.
According to secondary sources cited by Opec’s report, Riyadh cut back its output to 9.62mn bpd in December, while Saudi Arabia told Opec it raised supply to 9.82mn bpd.
Opec has yet to see any uptick in global oil demand. It expects world consumption to rise by 1.05mn bpd in 2014, virtually unchanged and less than the increase in supply from countries outside the group.
Another closely watched report on global oil supply and demand, from the International Energy Agency which advises industrialised countries, is due on Tuesday.