OPEC meets Monday amid nerves in the oil market
OPEC members meet to monitor the production cut and bring producers back in line
Tomorrow in St. Petersburg, Russia, members of the Organization of the Petroleum Exporting Countries (OPEC) and the so-called NOPEC alliance will meet to talk about how the oil production cuts are coming along. The answer will be: not that great.
OPEC's compliance with the agreed-upon production cuts slipped in June. The numbers vary a bit, but the International Energy Agency suggested that OPEC compliance fell to 78 per cent.
OPEC nations committed to cut just below 1.2 million barrels per day (bpd), and non-OPEC nations such as Russia and Mexico agreed to cut just under 600,000 bpd.
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Libya and Nigeria, OPEC members that are exempt from the cuts, both increased production in the past two months in the range of 300,000 bpd, undercutting support for the price of oil.
Much has been written about OPEC's waning influence in the oil market. Its attempts to push prices up over the past six months are the clearest illustration of that yet.
Nigeria and Libya asked to attend meeting
Nigeria and Libya's oil ministers have been invited to the meeting in St. Petersburg, which will also include representatives from Russia, Saudi Arabia, Algeria, Oman and Kuwait.
Libya has said it will attend the meeting, but Nigeria's oil minister said he won't although he said he is willing to talk at a later date.
There's some speculation that the two nations will be called to the carpet for their boost in production.
"I do think it's the beginning of that process," said Joe McMonigle, an energy analyst with Washington, D.C.-based Hedgeye and a former vice-chairman with the IEA.
He said the Saudis have decided that something needs to be done about the exemptions granted to Nigeria and Libya, which are trying to stabilize production in their countries after periods of conflict.
"I don't think they will seek cuts," said McMonigle. "But I do think they will [eventually] seek caps."
He points out that Libya has said it could add another quarter million barrels of production by the end of the year.
Oil market balance (or lack thereof)
Saudi Arabia is doing its best to stabilize oil prices ahead of the initial public offering of its state-owned oil company Saudi Aramco. The higher the price of oil before the IPO, the more the country will bring in. The stakes are high.
"As we get closer to the end of the years and 2018 when they are planning the IPO, it's about boosting prices," McMonigle said.
I like to say the the Saudis are working the refs.- Joe McMonigle , Hedgeye
There has been some positive news for the oil market in recent weeks. Demand from China and North America is improving, and U.S. inventories have drawn down, which is the signal market watchers look for.
These numbers are the most reliable indicator of whether the production cuts are bringing the oil market back into balance. Those numbers come from the U.S. Energy Information Administration (EIA), and last week's showed the inventories dropped by 4.7 million barrels in the week ended July 14.
That's the third draw-down in a row, and it pushed prices to a six-month high.
However, not everyone is convinced the market is, indeed, balanced.
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"I like to say the Saudis are working the refs, " said McMonigle, "They know the market is so focused on the EIA data, so starting in May, they started cutting exports to the U.S. to bring that number down."
"So, I think it's a little deceiving to say that the market is balancing."
Most observers of the market will consider it truly balanced once global inventories come down substantially and start to more closely reflect the usual five-year average levels.
There's no doubt that Saudi Arabia and the other OPEC members want to see the market balanced for reasons other that the Saudi Aramco IPO. The question is whether they have the power to influence even their own cartel members, not to mention Russia and the other big world producer, the United States.
Canada, as always, will sit on the sidelines.