By TLB Contributing Author: Luis Aureliano
Crude oil prices have remained depressed for much of the last two years in line with the basic economic principle that the price of a commodity must fall when its supply is more than the demand. Increased oil production globally – among OPEC producers and non-OPEC oil producers such as U.S., Russia, and Brazil has triggered a supply glut that sent the price of oil to multiyear lows. Last year, OPEC made headlines when it announced a historical deal to cut oil production among its member nations.
OPEC’s cut is yet to have a material effect in reducing the supply glut and causing oil prices to rise. In May, OPEC announced another deal to extend the timeline of the cuts in the hopes that cutting production for a longer duration will eventually end the supply glut. Now, fresh news indicate that OPEC’s oil output increased in June and the goal of ending the supply glut in crude oil remains elusive yet again.
OPEC reported increased crude oil output in June
In an independent report that OPEC cited in its Monthly Oil Market Report showed that crude oil production amomg its member nations increased by 393,000 barrels per day to 32.6 million barrels per day. The increase in OPEC’s crude production could be traced to increased output from Libya, Nigeria, and Saudi Arabia.
Libya and Nigeria have been originally exempted from the production cut deal because both countries have had to wrangle with lots of internal conflicts that caused massive reduction in their outputs. More so, both nations needed to pump out as much oil as they can despite the internal challenges and the low price of oil in order to keep their economies afloat.
In June, Libya increased its crude oil production by 127,000 barrels per day and Nigeria increased its production by 96,700 barrels per day as seen in the chart above. Essie Fleming, an analyst at Stern Options opines that “the massive increase in the oil output of both countries suggests that they’ve solved their biggest internal problems and we wouldn’t be surprised if OPEC asks them cut their oil output going forward.”
OPEC’s output deal might start falling apart from the center
The increased production from Libya and Nigeria is not as worrisome as the increase in oil output from Saudi Arabia. Saudi Arabia is OPEC’s unofficial leader and the Kingdom has been very vocal about the need for OPEC to deepen and extend cuts if it is really serious about ending the supply glut. However, self-reported data by Saudi Arabia revealed that the kingdom has raised its output by 190,000 barrels per day to pump out about 10.07 million barrels of oil per day in June.
Apart from increased output from Saudi Arabia, another worrisome data is that Saudi Arabia and OPEC’s tanker tracking data showed that there was an increase in June loadings. Hence, it is hard to reconcile the Kingdom’s actions with her words calling for deeper cuts. The Kingdom however is not to be blamed for losing faith in the production cut, other OPEC member nations have not shown serious commitment in compliance with the oil cut deal. In March, Saudi’s Energy Minister has said that the Kingdom won’t bear the burden of other non-compliant OPEC members; perhaps the increase in June crude shipments from Saudi Arabia.
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About the Author: Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.
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