Baku, Azerbaijan, Nov. 28
By Elena Kosolapova - Trend:
There are chances for the OPEC agreement on oil production cut, but its impact on oil prices will depend on the volume of cut, Arthur Berman, an independent US geological consultant with about 40 years of experience in petroleum exploration and production believes.
“I think that OPEC will reach some kind of agreement this week. There is considerable economic pressure on Saudi Arabia for higher margins to meet its fiscal budget requirements,” Berman told Trend by email.
The expert also noted that if OPEC ever had a strategy to stop the oil production in the US, it has not been overly successful. He reminded that US tight oil producers especially in the Permian basin have had ample access to capital especially when prices reach very low levels and investors see price upside.
Berman noted that in the past, Iran has been an obstacle to the OPEC agreement, but realistically, it cannot increase its production much more than it already has, without considerable investment in infrastructure and new drilling.
As for Iraq, it critically needs prices at or higher than current levels to maintain their fight against ISIS and to satisfy their budget needs, according to Berman.
The analyst also noted that Russia must be part of any agreement on oil production and it has signaled willingness to at least freeze the present output levels.
Meanwhile the expert stressed that OPEC is not a united front and has never been especially effective at assuring compliance among its members to past agreements. He reminded that production in Nigeria, Venezuela and Libya has decreased in the past few years due to civil unrests and economic problems.
“Of the three, Nigeria is more likely to increase output while Libya's and Venezuela's problems are more systemic and long-lived,” he said.
Commenting on OPEC agreement’s impact on oil prices, Berman noted that the agreement would increase prices by perhaps a few dollars although the market has already accommodated a few dollars into present prices in expectation of an agreement.
“A lot depends on how much OPEC actually cuts, given the range that has been discussed,” he said, adding that the current world production surplus is at least 1 million bpd and has shown little sustained momentum toward market balance.
According to OPEC’s November forecast, the world oil demand in 2016 will reach 94.4 million barrels per day. The world oil production in October, according to OPEC data, was 96.32 million barrels per day. Some 35 percent of the world liquids production comes from OPEC countries.
“If the OPEC cut approaches 1 million bpd, prices will stay higher longer but if the cut is only a few hundred thousand barrels per day, higher prices will be less durable,” Berman said.
The expert also noted that the US production has stopped declining and rig counts in the US tight oil plays have increased almost 20 percent since mid-September.
“Higher prices will provide incentive for higher levels of production [in the US],” he said.
In late September, OPEC agreed to cut its oil output for the first time since 2008. The group plans to reduce output to 32.5 million barrels per day (bpd) from current production of 33.24 million bpd. How much each country will produce is to be decided at the next formal meeting of OPEC on November 30.
Moreover OPEC officials were scheduled to meet with non-members including Russia on Nov. 28, but the meeting was cancelled last week after the Saudis decided not to take part. Saudi Arabia wants an OPEC deal in place before conversations with other producers such as Russia, one OPEC delegate told Bloomberg.
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