There’s no fun in being the only swinger in town – you’ve got to get others to join in.
With the Opec deal struck in Vienna this week, Saudi Arabia has tried to create a situation where as many members of the group as possible can, to a lesser extent, do what it has traditionally done – swing, or tailor production to market requirements.
But this return to a quota system in all but name belies the reality that faces Opec member states, many of which operate on the margins with little room for manoeuvre.
With perhaps 2mn b/d of spare capacity, Riyadh can turn the tap up or down at will. With little if any additional capacity and, in some cases, political and security crises or just plain poverty determining output, its fellow members cannot.
For this problem in microcosm, look to why it was that Angola had to be shoe-horned into the deal. All Opec members that agreed to cut — just 10 of 14 — did so from October production levels, apart from the west African nation, which had its September output set as a baseline. This was because in October, Angolan production was hit hard by maintenance at the 200,000 b/d Dalia field.
This field represents a mere 0.2pc of global supply, but the down time there rippled out across the globe. The outage at Dalia meant Angola’s recent run of export success stalled. The country had become the largest supplier of crude to China in the summer months, at the expense of Russia and Saudi Arabia. The downtime at Dalia meant Russia regained some market share, but also allowed Iran to sharply increase its deliveries to China.
The success or otherwise of Opec’s deal will be gauged by compliance. A 10pc leap in futures prices on the day of the meeting was welcomed warmly in finance ministries from Caracas to Kuwait City, but even the highest price in 18 months is likely around $5/bl shy of Opec’s ideal scenario. Encouragingly, though, the fourth quarter is shaping up to be the first in 10 where year-on-year price comparisons will be up, Swiss bank UBS notes.
It’s a fine line, of course, between replenishing Opec’s depleted coffers and discouraging the return of the US production shut in since output peaked there in April 2015. Morgan Stanley this week said there is a “real risk” that this cut kicks off new investment, “particularly in short-cycle US projects. “
At the Oil & Money conference in London this year, Hess chief executive John Hess said the US oil industry requires $50/bl to sustain crude production from shale formations at present levels. At $60/bl, shale oil production could increase by 300,000 b/d year on year, he said.
But Hess was at pains to say that would mean that other production sources would have to provide the bulk of forecast demand growth of around 1mn b/d – thus, shale oil production cannot be swing production.
And so Saudi Arabia remains the only swinger in town.