Oil producers interested in extending OPEC agreement - analyst

Oil producers interested in extending OPEC agreement - analyst

Baku, Azerbaijan, May 4

By Elena Kosolapova – Trend:

OPEC and non-OPEC oil producers are interested in extending the agreement to reduce oil production during the meeting in late May, Denis Davydov, chief analyst at the Russian Nordea Bank, said.

"We think that the countries will manage to agree,” Davydov told Trend over phone. “The extension of the current agreement is likely to be discussed at the meeting.”

He added that further reduction of oil production is unlikely to be discussed at the meeting because the countries which joined of the OPEC agreement intend to maintain the market share, while other oil producers which have not joined the agreement are close on their heels.

"Keeping the oil production volumes at the current level [after reduction] is probably the best option because OPEC has the task to target the global level of oil reserves, rather than the price," Davydov said.

In December 2016, OPEC and non-OPEC producers reached their first deal since 2001 to curtail oil output jointly and ease a global glut after more than two years of low prices. OPEC agreed to slash the output by 1.2 million barrels per day from Jan. 1, with top exporter Saudi Arabia cutting as much as 486,000 barrels per day. Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce the output by 558,000 barrels per day starting from Jan. 1, 2017 for six months, extendable for another six months.

The analyst added that the previous agreement on the reduction of oil production, despite the slight price increase since its signing, should be regarded as rather effective.

"The countries have been increasing their oil production without any control during 2-3 years, but trying to settle the market situation within six months," he said. “Given the weak demand growth, six months are not enough to stabilize the market.”

He added that it is beneficial for the OPEC biggest oil producers, namely, Saudi Arabia, Iran, Iraq, the UAE and, probably, Kuwait, to extend the agreement over the second half of 2017.

Davydov also added that it would be good for the OPEC deal participants if Libya and Nigeria, which have not joined the previous agreement, to join it this time.

He said that Libya has been recently an irritating country in the market, although its nominal oil production volumes are small.

"If Libya joins OPEC deal participants, it would be convenient for everyone,” Davydov said. “It will create more comfortable conditions for other participants and can be a favorable occasion for reaching agreement."

He said that Libya and Nigeria will likely to try to avoid obligations to reduce oil production.

Further speaking, he noted that there is certain risk, as if the agreement is extended, the US may increase its oil production.

"In a short time interval, it looks rather dangerous as further growth in oil production in the US can neutralize the results of OPEC actions," he said.

Davydov added that proceeding from geological exploration data, the US reserves are not unlimited and the US oil production is unlikely to go past the best results of the past.

"Without additional investments, there will be 9.5-9.6 million barrels of oil in the US per day, and the US is unlikely to continue to more increase oil production volumes.”

He said that the uncontrolled oil production growth will cause a new market collapse and in the long term it will lead to the lack of long-term investments.

“As a result it will change the situation in the market, which will affect everyone, mainly, shale oil producers,” he said.

"These investments are required,” he said. “Therefore, it is important for the market to achieve such a balance of reserves and prices that would allow the oil industry to continue to develop in a more harmonious way," the analyst said.

---

Follow the author on Twitter:@E_Kosolapova

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