OPEC’s Output Curb and its Global Impact


Last November 2016, the Organization of Petroleum Exporting Countries (OPEC) together with 14 member countries came to an agreement to reduce oil production in an attempt to raise prices. Oil prices have been down by more than half since mid-2014 due to global oversupply and booming US shale production.

Five months later, from 1.3 million barrels per day (bpd) now cut down to almost 1.8 million bpd it is still debatable whether OPEC’s solution to manage the worldwide glut that is happening will help.To some, it became an advantage. For others, it became a disadvantage.

Top traders saw this as an opportunity and are confident that the OPEC cuts will work and they bet that by selling their stakes in storage tank businesses that benefited from oversupply. They also expect OPEC to extend output cuts into the second half of 2017 which can help pull down global inventories.

Since mid-2014, the situation has been in a contago, in which, when inventories are abundant the oil price for future deliveries tend to be higher than prompt delivery. Sometimes the prompt price reaches more than $1 less than a barrel for delivery a month later.

Meanwhile, with OPEC’S effort to control oil output Asian countries such as China has been reaching out to other suppliers for crude including Africa and US. Current

The cut of production gave way for other nations to acquire a better footing in the developing Asian market such as those operating in West Africa.

Angola and Nigeria are all set to send China 1.48 million bpd of crude oil in April. The West African crude is expected to reach 2.4 million bpd this month for its Asian imports.

Sales of Nigerian grades also went up this month as trust in the reliability of the country’s flows has improved.

Moreover, according to the International Energy Agency (IEA), China may also become the world’s top oil buyer by the end of the year with 32 cargoes of mainly Angolan grades, which will help transport large amount of Angolan crude to Asia to about 1.31 million bpd this month.

Unfortunately, Iran and Tehran have both been struggling to keep up as Iran has sold all of its stock from its floating storage while Tehran is under pressure to keep exports from increasing as it struggles with the production limit.

Iran has sold its last supply of oil in the past two weeks. The oil was said to be condensate, which was a light grade of crude. With all of its stock sold, Iran lost its fundamental resource for maintaining exports.

Back in June 2016, Iran’s output went from 2.9 million bpd to 3.6 million bpd. The country fought hard with its OPEC colleagues to be excluded from the production cuts that came into effect on January 1st which will last until June. OPEC gave Iran a small increase to make up for years of separation, but produced less in the past three months.

Last month, Tehran was ready to manufacture 3.8 million bpd if OPEC agreed to extend the production curb in the second half of 2016.

Meanwhile, oil prices went up on Thursday. This is its fourth gain after recovering losses caused by high US crude inventories.

Brent oil futures edged up on Thursday by 19 cents from $54.56 to $54.75 bpd as of 13:04 GMT, while crude oil WTI futures increase by 22 cents from $51.28 to $51.50 a barrel.

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