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Emboldened by the oil market's recovery, OPEC readies the taps -- just in case

London — Having patiently waited a year for the oil market to turn, many OPEC members are now feeling confident enough in its recovery to begin touting their output expansion plans, even as they insist they will comply with their quotas under their production cut agreement.

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In recent weeks, Kuwaiti oil minister Bakheet al-Rashidi has declared that his country will boost its production capacity to 3.225 million b/d by the end of March, up from its current 3 million b/d, while normally hawkish Iranian oil minister Bijan Zanganeh has said his country could raise its output by 100,000 b/d within days if the deal were to be terminated.

Iraqi oil minister Jabbar al-Luaibi at a conference in London trumpeted the record 4.6 million b/d in export capacity now built in the southern port of Basra and proclaimed that it would reach 5 million b/d by year's end.

The UAE also has ambitions of hiking its production capabilities to 3.5 million b/d from around 3 million b/d later this year.

While all of them have insisted that these capacity gains will not be unleashed while the production cut deal is in force, their declarations provide perhaps a warning that, for all the talk of an orderly exit from the agreement, countries may be champing at the bit to pump more and earn more.

Or, they may be serving as an intra-OPEC warning shot to unstable Venezuela, Libya and Nigeria that their cohorts may not be so magnanimous as to stay on the sidelines if their respective domestic crises cause output to fall.

"Current price levels are likely to encourage additional drilling .. as producers seek to take advantage of attractive economics," analysts with Barclays said in a recent note.

The deal, which commits OPEC and 10 non-OPEC producers led by Russia to cut 1.8 million b/d in supplies through the end of 2018, is aimed at reducing the global inventory overhang.

Some 100 million barrels above the five-year average remain in storage, ministers have said, insisting that their work to rebalance the market is far from done.

However, they also say they will be nimble as they monitor the market, and the recent comments on boosting production capacity indicate that countries stand ready to act if supplies are needed.

"We will not wait until the excess inventories get to zero before we do something if needed," one source who spoke on condition of anonymity told S&P Global Platts.

The coalition is comfortable with current price levels at the moment and will wait to see how fundamentals evolve in the coming months, the source added.


So far, the market has largely shrugged off these announcements, with the recent sell-off in oil futures largely tied to greater macroeconomic fears of inflation and a related stock-market dive.

ICE Brent was trading at $64.31/b at 1110 GMT Friday.

Geopolitics and expectations of strong global demand appear to be supporting oil prices, even as US production hits new highs and refinery maintenance season looms.

It's a far cry from last summer, when prices were slumping, compliance with the cuts was slipping, and similar comments from ministers on upstream ambitions contributed to flagging trader confidence that OPEC and its allies would have the backbone to successfully tame the global supply glut.

Libya, which was exempt from the cuts as it tried to rebuild from a devastating civil war, was pitching its production target of 1.25 million b/d by year's end, double its levels from the beginning of 2017.

Ecuador was seeking its own exemption and threatening to withdraw from the pact, saying it could no longer afford to keep barrels in the ground.

Iraq, whose compliance with its quota has been lackluster from the start, was insisting that the deal only concerned crude exports, not production, contrary to the text of the agreement.

The lack of messaging discipline was galling to members who wanted the deal to hold, as prices slumped to below $45/b in June.

"I'm going to tell my colleagues, 'Can we just agree to keep quiet?'" Oman oil minister Mohammed al-Rumhy told S&P Global Platts in a July interview, just before the deal's monitoring committee met in St Petersburg. "This is the easiest decision for all member states to do if they want to increase the price. Just keep [any expansion plans] to yourselves and your offices."


Rumhy's counterparts appear to have gotten the message, and until the recent declarations of expansion plans, ministers from the OPEC/non-OPEC coalition have largely been disciplined in their comments, pledging adherence to their production cuts and brushing aside any suggestions of an early exit.

Libya, which produced 980,000 b/d in January, according to the latest S&P Global Platts OPEC survey, has quietly abandoned talk of its aggressive output target, while 520,000 b/d producer Ecuador has been convinced to remain in the fold and stop rocking the boat.

Even Iraq has begun reporting lower production -- though still in excess of its quota of 4.35 million b/d -- with up to 300,000 b/d held offline in the wake of the federal government's takeover of fields formerly controlled by the Kurdistan Regional Government.

Iraq pumped 4.41 million b/d in January, the S&P Global Platts OPEC survey found.

Most analysts project stock builds in the first half of the year, when demand is traditionally lower.

But with the outlook for the global economy robust, some market watchers have warned that the OPEC/non-OPEC cuts may overtighten balances in the second half of the year, particularly with most inventory data reported on a two-month time lag.

The International Energy Agency estimates that OPEC holds some 3.24 million b/d of spare capacity, about 10% above its December output of 32.23 million b/d, most of it concentrated in the Gulf Cooperation Council countries led by Saudi Arabia.

Two projects are also set to launch offshore West Africa later this year -- Kaombo in Angola and Egina in Nigeria -- that could add up to 400,000 b/d of new production.

Those barrels may be key to preventing a price spike in the summer high demand season, especially if Venezuelan production continues to plummet amid its dire financial crisis, as many analysts say is likely, or security-fraught Libya and Nigeria are unable to protect their oil facilities from militant attacks and sabotage.

At last month's monitoring committee meeting in Oman, UAE energy minister Suhail al-Mazrouei said it was too early for OPEC to consider stepping in to replace Venezuela's declining barrels.

Venezuela has seen its crude output fall for six straight months to 1.64 million b/d in January, according to the S&P Global Platts OPEC survey, 330,000 b/d below its quota under the deal.

"Within the group, I think we can accommodate [Venezuela's fall]," Mazrouei said. "We have accommodated in the past, and if we are called to do something by Venezuela to interfere and the imbalance in the market is huge, then this group historically has been responsible."

--Herman Wang,
--Edited by Maurice Geller,