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Home / Blogs / Saudi Arabia Cuts Oil Exports as OPEC Looks to Stem Crude-Price Slide, By  Georgi Kantchev,   Nathan Hodge and   Benoit Faucon

Saudi Arabia Cuts Oil Exports as OPEC Looks to Stem Crude-Price Slide, By  Georgi Kantchev,   Nathan Hodge and   Benoit Faucon

Country’s energy minister blasts cartel members for ‘overproducing’

 ST. PETERSBURG, Russia—Internal discord among OPEC members and big oil-producing allies spilled into public view Monday as the group struggles with its efforts to raise prices for crude.

Until now, the Organization of the Petroleum Exporting Countries had largely blamed low prices on U.S. shale drillers, which are at the heart of an American oil boom that has decimated the group’s power. Oil prices have actually fallen since OPEC’s 14 members and 10 other big producers struck a deal in December to withhold 2% of global oil supply, in part because American producers ramped up output.

OPEC officials said they were now looking inward and contemplating a crackdown on members that aren’t keeping their promises to limit output. OPEC production rose again in July to over 33 million barrels a day, a Petro-Logistics report said last week, near the group’s record levels of 2016.

OPEC officials expressed frustration with a new truth of the oil market: The group no longer has much power to lift prices, but it can certainly send prices lower with too much production. Iraq, the United Arab Emirates and others haven’t cut as much output as promised.

“We are not doing this to allow other countries to free ride and undercut the agreement by overproducing,” said Khalid al-Falih, the Saudi Arabian energy minister, in unusually blunt remarks following a meeting Monday with national representatives from oil-producing countries.

Mr. Falih said Saudi Arabia, the world’s top oil exporter, announced it would go further than cutting its production and would also limit its exports at 6.6 million barrels a day in August. He said he wanted other countries to follow suit, noting troubling figures that showed some were still exporting huge amounts of oil even as they say they are cutting output.

OPEC also secured a production commitment from Nigeria, a group member exempted from last year’s deal, although that isn’t likely to have an immediate effect on the crude market.

“We are aiming to bring those who are slacking to full conformity,” said Russian Energy Minister Alexander Novak in an interview. Russia isn’t an OPEC member, but its commitment to limit output was crucial to securing an OPEC deal last fall.

Crude prices rose modestly after Monday’s meeting. U.S. crude futures were up 1.25%, to $46.34 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose 1.12% to $48.60 a barrel on ICE Futures Europe.

Mr. Falih’s focus on exports was new. He pointed to discrepancies between countries’ production and export figures, calling the difference “a matter of concern.”

Saudi Energy Minister Khalid al-Falih, pictured in June, said Monday at an OPEC meeting that Saudi Arabia, the world’s top oil exporter, would limit its exports at 6.6 million barrels a day in August.
Saudi Energy Minister Khalid al-Falih, pictured in June, said Monday at an OPEC meeting that Saudi Arabia, the world’s top oil exporter, would limit its exports at 6.6 million barrels a day in August. PHOTO: IGOR RUSSAK/ZUMA PRESS

For example, OPEC’s production fell by 920,000 barrels a day from October to June, according to the International Energy Agency. But its exports were only 120,000 barrels a day lower in June compared with October, according to Kpler, a ship-tracking firm.

So even with OPEC cutting production, it was still sending roughly the same amount of oil into the global market in June as it was in October, the month used as the baseline level for the production deal.

“Exports have become the key metric for financial markets, and we need to find a way to reconcile credible export data with production data,” Mr. Falih said.

The announcements came after meetings in St. Petersburg over the weekend and a gathering of big producers at the Four Seasons Hotel. It highlighted how worried OPEC members have become about the futility of their efforts.

“This is a collective effort,” Mr. Falih said after the meeting, saying he had held a teleconference with absent countries that haven’t been cutting to “forcefully demand participation and the same level of commitment…We are not going to just sit back and watch.”

Mr. Falih is under pressure to keep the OPEC deal from falling apart and raise prices, The Wall Street Journal has reported. The Saudi kingdom is preparing to publicly list its state oil company in 2018, and its valuation will depend in part on oil prices.

Mr. Falih has become concerned about the deal as prices kept falling in recent weeks and bad news kept rolling in, according to people familiar with the matter. He said Saudi Arabia could support extending the production deal beyond its expiration in March 2018. It culminated last week with tanker-tracking firm Petro-Logistics reporting OPEC output rose above 33 million barrels a day this month, up 145,000 barrels a day from a month ago.

Even if Monday’s news gives oil prices a lasting lift, OPEC still has to worry about U.S. shale producers taking advantage and throttling up output. That is what happened after last year’s OPEC deal, and the flood of new oil from the U.S. is one reason oil prices remain depressed.

Giovanni Staunovo, commodity analyst at Swiss bank UBS Group AG, said the production deal has “a 20%-30% probability of a breakdown.

“Should this happen, countries bound by the deal would likely immediately ramp up production back to predeal levels, the oil market would move from a deficit into oversupply, and prices may plunge heavily,” Mr. Staunovo said.

A new Saudi cut to its exports could have a real effect on the balance of supply and demand, said Bjarne Schieldrop, a commodity analyst with the Nordic bank SEB. The kingdom exported an average of 7.2 million barrels a day from January to May, he said, so the new action would theoretically remove an additional 600,000 barrels a day from the market.

But Saudi Arabia generally reduces exports in the summer when it faces rising domestic demand for crude oil to be burned to create electricity for air conditioning.

The limit on Nigeria, however, is less likely to result in helping reduce the oil glut. Nigeria has agreed to limit its production to 1.8 million barrels a day, OPEC officials said. The African country produced about 1.6 million barrels a day in June, giving it substantial room to keep increasing.

Another OPEC member exempted from last year’s deal, Libya, has a target of 1.25 million barrels a day, still higher than its June production of 820,000 million barrels a day.

Beyond Libya and Nigeria, Iraq, OPEC’s second-biggest producer, and the U.A.E. have been pumping more than their agreed-upon limits.

“We’ve had very serious discussions with those countries that are not performing as well as others,” Mr. Falih said, saying there were unspecified “mechanisms in place to bring those countries in line.”

Analysts have warned that any new production cuts from OPEC would likely just help American shale producers. First, it would cede market share to the U.S. from OPEC. Second, any price rally would likely be quickly killed by new shale production, they say.

Write to Georgi Kantchev at georgi.kantchev@wsj.com, Nathan Hodge at nathan.hodge@wsj.com and Benoit Faucon at benoit.faucon@wsj.com

Appeared in the July 25, 2017, print edition as ‘OPEC Takes Blame for Low Price.’

Sent by WSJ

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