As oil prices continue to struggle in the mid-40s, OPEC is considering lifting exemptions from the production cut agreement for Libya and Nigeria which have both added nearly 800,000 barrels per day (b/d) in crude production since the OPEC deal was reached last November.
We are currently in a verbal intervention phase of the concept and at early stages. The market should not expect any big announcements or catalysts in the coming weeks. However, we do think this is a serious effort and could culminate with some agreement at the November 30 OPEC meeting in Vienna.
We think it’s unlikely that any agreed cuts from either producer would be significant but even a cap on production could have an impact as Libya targets its former production level of 1.6 million b/d.
The Wall Street Journal first reported the news last Friday but we have been hearing about such an option from our OPEC friends even before the last OPEC meeting in late May. There was a move at the May meeting to lift the exemption for Nigeria but it was quickly scrapped after Iraq made noises that it wanted to take Nigeria’s place on the exemption list.
Libya and Nigeria energy officials will be invited to the upcoming OPEC/Non-OPEC Joint Ministerial Monitoring Committee (JMMC) meeting on July 24 in St. Petersburg, Russia. There are press reports today that the Nigerian Minister will not attend but we believe he will be persuaded by OPEC Secretary-General Mohammed Barkindo, himself a former Nigerian government official, to attend the gathering. We expect the Libyan Minister will also attend.
Ministers from Saudi Arabia, Kuwait, Russia, Algeria, Oman and Venezuela are members of the JMMC and will also attend the meeting.
OPEC says it only intends to conduct consultations the Libyan and Nigerian officials about their current production levels at the meeting in Russia but it will not result in any agreements on production limits.
Libyan production has now surpassed one million b/d and combined with increased production from Nigeria is undermining the OPEC production cut agreement. International oil companies operating in Libya tell us that they are optimistic that current production levels can be sustained and that a retreat back to a 400,000 or 500,000 b/d range is unlikely. While the political and security situation in Libya is still unstable, we have been impressed by the optimism from operators on the ground.
It is still unclear if lifting the exemption would result in caps at current production levels or cuts like other participants in the deal are doing. While we expect resistance to the idea from Libya and Nigeria, we think an agreement could be crafted that allows for some type of escape hatch if the political or security situation in either country deteriorates.
