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Commodities Report: OPEC Aims to Recalibrate -- WSJ

23 Sep 2017 6:32 am
By Benoit Faucon and Summer Said 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 23, 2017).

VIENNA -- The Organization of the Petroleum Exporting Countries is scrambling to contain output from its strife-torn members Libya and Nigeria, where surging production could threaten to derail the oil cartel's efforts to withhold crude supply and raise its price.

Libya and Nigeria were exempt from OPEC's agreement last year to join with Russia and other producers to cut about 2% of the world's oil production. The countries' oil industries at the time were crippled by civil unrest and weren't expected to recover soon.

Both have since struck deals with militants, allowing the spigots to be turned on again.

Libya and Nigeria have added 550,000 barrels a day of crude-oil production since October, the month OPEC uses as a benchmark for its cuts, according to figures from the International Energy Agency.

That new output wipes out almost half of the cuts achieved by OPEC's other members -- about 1.2 million barrels a day.

OPEC has asked Nigerian oil minister Emmanuel Ibe Kachikwu and Libyan oil chief Mustafa Sanallah to explain their production plans at a meeting Friday. Mr. Kachikwu said his country is willing to cap its production but not until production had stabilized at higher levels.

"If these countries stabilize around certain levels and hold them around a period of time, then this would be the time for them to join this initiative," said Russian Energy Minister Alexander Novak, whose country isn't an OPEC member but who has taken on a leading role this year in regulating output.

OPEC -- and allies such as Russia -- didn't make a recommendation Friday on whether the group should extend its oil cuts beyond March 2018. OPEC will have a full meeting on Nov. 30 to decide on production.

Oil prices were up slightly after Friday's meeting. Brent crude, the international benchmark, was up 0.57% in London, trading at $56.41, while U.S. prices were up 0.24%, at $50.67.

Oil prices have risen 10% in the past three weeks on optimism that OPEC's production cuts, announced last year and put in effect this year, were finally working.

OPEC members' national oil ministers on Friday praised the effect of their production cuts. Kuwaiti Oil Minister Essam al-Marzouq said the developed world's oil inventories had fallen by 170 million barrels from January to August. OPEC is trying to bring oil inventories down closer to historic averages.

"While we are on the right track and there is more light at the end of the tunnel, this is not the time to take our foot off the accelerator," he said.

However, Libya and Nigeria are pumping out so much new oil that, combined with robust output from the U.S., they are keeping the world well supplied with crude and weighing down prices, said Ian Taylor, chief executive of Vitol Group, the world's largest independent oil trader.

Mr. Taylor said he doesn't see oil reaching $60 a barrel this year. "I would be very surprised to see it with a six in front of it before the end of the year," he said. "I don't think it's going to happen."

OPEC has no legal mechanism to force Libya and Nigeria to join its output cuts, though it has expelled members, such as Indonesia, who refused to get on board when a consensus was reached. The cartel can also put public pressure on countries to get in line.

For their part, Nigeria and Libya say they have no immediate plans to pull back.

In Nigeria, oil production rose to 1.69 million barrels a day in August, its highest level since February 2016.

The increase follows a cease-fire that Vice President Oluyemi Osinbajo sealed with militants in the country's oil-rich Niger Delta. The militants had cut off pipelines to export hubs in a complicated standoff with the government over money and services, contributing to the country's first recession in 25 years and leading to rising unemployment.

Mr. Kachikwu said he is supportive of OPEC's policy and would cap his country's production at 1.8 million barrels a day but wants to wait another six months to see if the country's output can stabilize at higher levels. "Our numbers haven't shown that yet. So there really isn't any issue for debate here," he said.

Libyan production has shot up even faster, reaching 1 million barrels a day in July for the first time in four years. As recently as August 2016, Libya's output was below 300,000 barrels a day.

A top official at Libya's National Oil Co. said his country had no intention to cap its output for now. "Our production is too unstable," he said. "There is fighting everywhere," citing armed clashes between Islamist militias and their foes.

Libya remains divided between a United Nations-backed government in Tripoli and militias in the east aligned with Egypt and Russia. Islamic State is regrouping in the vacuum, The Wall Street Journal has reported, plotting attacks both in Libya and elsewhere.

Saudi Arabia oil minister Khalid Falih didn't attend but called in. He has lobbied Nigeria and Libya to join in cuts but also served as a buffer between the countries and members who want to take a harder line against them.

The meeting "put OPEC's problem children under the microscope," said Helima Croft, chief commodities strategist at RBC Capital Markets.

--Sarah McFarlane in London and Sarah Kent in Abuja, Nigeria, contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com and Summer Said at summer.said@wsj.com

(END) Dow Jones Newswires

September 23, 2017 02:32 ET (06:32 GMT)

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