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OPEC Seeks to Contain Its 'Problem Children

22 Sep 2017 8:00 am
By Benoit Faucon in Vienna, Sarah Kent in Abuja and Sarah McFarlane in London 

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 any time soon.

Both have since struck deals with militants that turned on the spigots 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 -- over 1.2 million barrels a day, even more than they promised last year to slash.

OPEC has asked Nigerian oil minister Emmanuel Ibe Kachikwu and Libyan oil chief Mustafa Sanallah to explain their production plans at a meeting Friday, which comes as OPEC members develop a plan ahead of their next full gathering on Nov. 30.

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."

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. U.S. oil prices settled down 14 cents, or 0.3%, at $50.55 a barrel on Thursday.

In its monthly bulletin released Wednesday, OPEC said production cuts had helped drained 145 million barrels of oil from the developed world's inventories, which had grown to record levels when crude was more abundant and cheap. OPEC is trying to bring oil inventories closer to historic averages.

"There is no doubt that the oil market is moving in the right direction, " the bulletin said.

But privately, people familiar with the matter say, OPEC and allies who agreed to cut output in tandem, including Russia and Kazakhstan, have grown concerned that the exemptions for Libya and Nigeria could backfire.

OPEC has no legal mechanism to force Libya and Nigeria to join its output cuts, though it has expelled members, like 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 plans to pull back.

In Nigeria, oil production rose to 1.66 million barrels a day in August, its highest level since February 2016, according to the IEA.

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's supportive of OPEC's policy, 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. "I haven't seen any pressure on me from anybody."

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. "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.

Speaking to reporters late Thursday, Russian energy minister Alexander Novak said attendees at Friday's meeting would discuss possible production caps with Libya and Nigeria. But he added it would be hard to demand restrictions from Nigeria because its "production is volatile."

The meeting won't include Saudi Arabia oil minister Khalid Falih, who 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.

Mr. Falih's absence "will put OPEC's problem children under the microscope," said Helima Croft, chief commodities strategist at RBC Capital Markets. No reason has been given for Mr. Falih's likely absence.

--Summer Said in Vienna contributed to this article.
 

(END) Dow Jones Newswires

September 22, 2017 04:00 ET (08:00 GMT)

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