Crispin Hawes

Managing Director, Middle East & North Africa

OPEC: Extension Likely, but Nigeria and Libya Will Not Commit to Real World Cuts

The most important player at this year’s OPEC summit in Vienna today, 30 November, is not a member of the organization; it is the Russian government. Within OPEC and among other non-OPEC partners to the November 2016 production agreement, there is broad consensus that the deal should be extended past its current deadline of end-March 2018 through to the end of the year; the Russian administration is less convinced. While there is an ongoing discussion between the OPEC permanent delegations over what role, if any, Nigeria and Libya should play in the deal, neither country is likely to agree to a production ceiling unless it is comfortably above achievable output.

Russian lack of enthusiasm over extending the production agreement to the end of next year relates to fears that Brent or WTI prices above USD 60/barrel will see US unconventional producers make further inroads into Russian companies’ market share. The expansion of Russian production is already being mothballed because of loss of customers, making the threat of higher unconventional production even more serious. For Saudi Arabia, which along with Russia has been the most important player in negotiating the agreement, this dissonance poses some challenges, not least because its revenue needs are not even close to being satisfied at USD 60/barrel. As noted, official data show a dramatic drop in the kingdom’s fiscal deficit over 2017. However, the financing requirement implied by borrowing and drawdowns against reserves suggests the recent rise in crude prices is insufficient for Saudi fiscal needs, particularly given the over-riding role that state spending plays in domestic growth.

Nevertheless, Russian officials are happy for the current production deal to extend at least until March and a compromise is likely to be reached that allows at least for a shorter extension, but perhaps even a commitment to hold to the cuts until the end of the year that could then be revisited should market conditions allow. For both Nigeria and Libya, however, neither country’s political environment will support the extension of cuts to their production. However, both countries have made claims for their output prospects that defy credibility, meaning that they could agree to a notional production limit that is in practice beyond their capacity to exceed.