Opec may finally be willing to curb oil glut, just not yet

An off-shore oil rig is seen off the coast of Port-Gentil.
An off-shore oil rig is seen off the coast of Port-Gentil. PHOTO: AFP

DUBAI (BLOOMBERG) - After two years of pumping without limits, Opec may finally be ready to do something to shrink the global glut. Just not quite yet.

Saudi Arabia has offered to reduce production to January levels, according to Algeria's Energy Minister. That would remove about half of the kingdom's 1 million barrel-a-day increase in output since it led the Organisation of Petroleum Exporting Countries' (Opec) push to defend market share in 2014. While Iran was said to have rejected the Saudi offer, the chance of the group eventually taking action is growing, said consultant JBC Energy GmbH.

"The Saudis and the Iranians are talking and they're not as far apart as they were in the Doha meeting" in April when a proposal to freeze output failed, said Michael Poulsen, an analyst at Global Risk Management Ltd. "The symbolism would be more important than the actual number in the event that something is agreed to be cut."

Opec's decision to abandon its long-standing strategy of supporting prices by cutting production has defined the market since November 2014. Members, led by Saudi Arabia, have boosted output almost 10 percent to 33.7 million barrels a day. That's driven US output down 11 per cent, but also hammered oil exporters' own economies as prices languish at half their level two years ago.

With the International Energy Agency forecasting a fourth year of surplus in 2017 as non-Opec supply proves resilient to low prices, the strategy may be shifting.

"The chances that OPEC will take some action over the remainder of the year - although probably only at the regular meeting in Vienna on 30 November - appear to be rising," Vienna-based JBC said in an e-mailed note. A surplus of 2 million barrels a day looms early next year and "in such an environment, players as diverse as Iran, Russia, and Saudi Arabia would probably find common ground."

More than 800,000 barrels a day of additional crude is entering the global market this month compared with August. Libya and Nigeria are restoring disrupted supplies, according to statements from ministry officials. Russia, the largest non-OPEC producer that will also be present in Algiers, is pumping at a post-Soviet high. The Kashagan field in Kazakhstan, one of the largest oil projects in the world, is due to start next month after years of delay.

World oil stockpiles will continue to accumulate through 2017, according to the IEA. Consumption growth sagged to a two- year low in the third quarter as demand faltered in China and India, while record output from OPEC's Gulf members is compounding the glut, it said. Just last month the agency predicted the market would return to equilibrium this year.

The oil market is in a "much more critical" state than when OPEC last met three months ago, Algerian Energy Minister Noureddine Boutarfa said Sunday in an interview with Bloomberg television. Now is the "right time" for OPEC to reach an agreement, said Falah Al-Amri, Iraq's governor to the group.