Nigeria has pledged to cut production by 57,000 barrels a day to comply with its agreed OPEC+ quota. This vow came as the joint marketing monitoring committee formed by OPEC and its allies known as OPEC+ met on Thursday in Abu Dhabi prior to the policy decision making meeting in Vienna scheduled for December 5th. According to the International Energy Agenc (IEA) Nigeria produced 2.386 million barrels of oil daily in August. Though that estimate is misleading. Under the agreement Nigeria should produce no more than 1.685 million barrels per day it agreed to in December 2018. Yet Nigeria can claim 600,000 barrels included in the IEA report are condensates which are not quota restricted and fall outside any production cuts. According to the secondary sources OPEC uses to calculate official production and compliance rates in August, Nigeria pumped 1.866 million bpd, up by 86,000 bpd from July.
Brent crude Oil prices have dropped below $60 in recent weeks with oil demand looking bleak off the back of the on going US-China trade war. There has been some suggestion that OPEC+ may consider further cuts but Saudi Arabia’s new energy minister, Prince Abdulaziz bin Salman, said deeper cuts would not be decided before a meeting of the Organization of the Petroleum Exporting Countries planned for December.
Overall the meeting yielded promises to keep countries within the production quotas they committed to in the global supply cut deal, which would limit oil coming to the market as Nigeria, Iraq and Russia have, at times, produced more than their allocations. Though Saudi’s Prince Abdulaziz reiterated his country committment to cut more production than it pledged in the pact. The Joint Ministerial Monitoring Committee concluded that another 400,000 bpd would be taken out of the market if OPEC+ members complied with their quotas
The medium term oil outlook is further complicated by US shale output, whose surging production has created the bearish sentiment in the market. It is complicated because I remain uncertain that there is enough tier 1 basins in the US that can support sustainable production growth. If President Trump gets his way and the Fed go negative on rates it lends shale a life line, but in my opinion could ultimately create the same sort of debt bubble as sub-prime. On the evidence of the last quarter shale production is no longer surging though even current levels of production contribute significantly to market overssupply.
The Paris based International Energy Agency (IEA) kept its oil demand growth forecasts for 2019 and 2020 at 1.1 million bpd and 1.3 million bpd, respectively. The IEA forecast that demand for Nigeria’s and by extension OPEC+’s oil will reduce to 28.3m bpd in the first half of 2020. This at a time when Iran and Venezuela are under sanctions and Libya struggling. Though the EIA confirmed last week that the US crude inventory is at its lowest for over a year. The US stockpile of crude oil dropped by nearly 7 million barrels last week, but the bullish data did little to support crude oil benchmarks. Especially at a time when it seems that President Trump's tepid willingness to engage with Iran's President Rouhani might see him consider easing oil sanctions on Iran. The addition of Iranian barrels in to the market would plunge oil prices at a time the Saudis are committed to bolstering the barrel price.
I like many commentators see the appointment of Prince Abdulaziz Salman as a clear indication of the Saudi's strategy to boost the barrel price prior to a Aramco IPO. This is why I believe further cuts are inevitable. The sale of Aramco will provide a windfall for the Saudi government which they need to exponentiate. This means bending OPEC+ to their will whilst continually pumping under their own quota in a bid to boost crude oil prices.