Opec chases its own tail

On the face of it, the September market reports from the IEA and from Opec itself offer encouragement to the oil exporters group.

“The Saudi-led Opec strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, ‘inefficient’ production,” said the Paris-based watchdog as it forecast a 500,000 b/d fall in non-Opec production in 2015 – that’s a fall in actual output, not a fall in the projected growth. With 2015 demand growth forecast to hit a five-year high and 2016 seen above trend, the OECD agency bumped its call on Opec crude this year up by 200,000 b/d to 29.7mn b/d, with the 2016 call vaulting by 500,000 b/d to 31.3mn b/d.

Opec is cautious in its optimism: “Despite moderate economic growth, recent data shows better-than-expected oil-demand in the main consuming countries. This is mainly driven by lower oil prices. At the same time, US oil production has shown signs of slowing. This could contribute to a reduction in the imbalance of oil market fundamentals, however, it remains to be seen to what extent this can be achieved in the months to come.”

The group sees global demand rising by 1.46mn b/d in 2015 — some 84,000 b/d faster than forecast last month — but below the IEA’s 1.7mn b/d. For 2016, Opec pared its consumption growth projection by around 50,000 b/d to 1.29mn b/d, again below the IEA figure of 1.4mn b/d.

And its outlook for the call on its own crude is also well below the IEA’s, at 29.3mn b/d for this year, an increase of just 100,000 b/d from last month’s report, and 30.3mn b/d for 2015, an increase of 200,000 b/d but one leaving the call a whole 1mn b/d lower than the IEA’s forecast.

Setting these numbers against the 30mn b/d ceiling is pointless as, despite the grumbling of Iran and others, that aspirational figure became even more irrelevant with the November 2014 adoption of the market share strategy. What is more relevant is setting the call against the declared production and assessed actual production levels. Libya hasn’t reported a number to the secretariat in recent months, but using a pretty uncontroversial Argus reckoning of 400,000 b/d for that country and all the other members’ direct submissions to Opec, declared August production was 31.97mn b/d, little changed from July. Opec is producing well above the call on its crude now, according to its members’ own reporting. Argus’ estimate for August is about 31.5mn b/d. So, whichever way you look at it, Opec is pumping way above the call on its crude.

The outlook for next year is, ostensibly, rosier with those higher figures for the call on Opec. But that ignores at least two elephants in the room. The first is the return of sanctions-hit Iranian barrels to the market, which seems ever more certain. There may be scepticism about claims from Tehran that 1mn b/d can be conjured up in a matter of months, but 500,000 b/d is less fanciful. And, while Argus’ independent estimates of Iraqi crude output are all-embracing, those issued by the oil ministry in Baghdad and submitted to Opec are not — they exclude crude produced by foreign oil companies operating in the territory controlled by the Kurdistan Regional Government. So, actual production from Iraq’s sovereign territory was as much as 500,000 b/d higher than Baghdad reported — exports from KRG-operated fields of over 350,000 b/d plus domestic consumption of 120,000-150,000 b/d. And, as early September loading data show, that figure is well below capacity.

If Opec aspires to matching production to the call on its crude in 2016, it is chasing its tail.

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