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Opec under pressure to act in Algiers as oil surplus triples

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As Opec prepares to meet in Algiers next week, the oil market is reminding the group's members what's at stake if they fail to reach a deal.

[LONDON] As Opec prepares to meet in Algiers next week, the oil market is reminding the group's members what's at stake if they fail to reach a deal.

More than 800,000 barrels a day of additional crude is pouring into the global market this month from last as Russia pumps at an all-time high while Libya and Nigeria restore disrupted supplies, according to statements from their ministry officials. That would imply a tripling of the supply surplus, estimated currently at about 400,000 barrels a day by the International Energy Agency.

"We are overproducing and we're not going to draw down inventories like we thought we would," said Chris Bake, a senior executive at Vitol Group, the biggest independent crude trader. "We're still building crude inventories and that's a problem."

The global oil oversupply will persist into 2017 as members of the Organization of Petroleum Exporting Countries such as Saudi Arabia pump near record levels, others such as Iran and Iraq bolster capacity and production outside the group weathers the price slump, according to the IEA. Prices may struggle to hold above US$40 a barrel unless Opec acts, Citigroup Inc predicts.

Crude is stuck at less than half the level it averaged at the start of the decade, straining the finances of producers around the world. Oil rallied last month on speculation Opec and Russia might revive a pact to cap production, though prices have since cooled.

While Opec officials have been meeting from Vienna to Paris to Moscow in attempts to reach consensus, there's skepticism a deal will be possible. All but two of 23 analysts surveyed by Bloomberg this week predicted there won't be an agreement in Algiers on Sept 28.

The volatility in supply created by the unexpected return of exports from Libya and Nigeria makes it harder to settle on any plan for stabilising the market, Ed Morse, New York-based head of commodities research at Citigroup, said by phone.

"There's just too much oil in the market," said Mr Morse. "It's very difficult to come to the conclusion that a freeze would be credible or doable when you've got the combination of what's happening in Libya and Nigeria. It makes a shambles of any extrapolation of balances."

Libya's output has climbed to 390,000 barrels a day after a halt in fighting between rival armed factions, National Oil Corp chairman Mustafa Sanalla said on Sept 22. That's 50 per cent higher than the monthly average for August estimated by Bloomberg.

Nigeria has revived output to 1.75 million barrels a day following a ceasefire deal with militants in the Niger Delta region, Minister of State for Petroleum Resources Emmanuel Kachikwu said on Sept 19. That compares with 1.44 million last month, near the lowest in more than two decades, according to data compiled by Bloomberg.

Russia pushed output to a new record 11.09 million barrels a day in September, Energy Ministry data show. While President Vladimir Putin said on Sept 2 that producers can overcome the tensions that have so far prevented an agreement, there are doubts over the practicalities of Russia's involvement.

"No Russian contribution to a freeze is believable" as the government doesn't have enough control over companies like Rosneft PJSC to prevent them from boosting supply, Citigroup's Mr Morse said.

Opec's last attempt at a deal with Russia collapsed in Doha on April 17 when Saudi Arabia's influential Deputy Crown Prince Mohammed bin Salman insisted at the last minute that Iran had to participate in a freeze. Iran refused as it was just starting to revive exports following the end of international sanctions.

Now that Iran has returned to pre-sanctions production capacity, "the odds are in favour" of some basic agreement, said Helima Croft, chief commodities strategist at RBC Capital Markets LLC in New York.

Saudi Arabia may also have a stronger incentive to cooperate as the global surplus lingers and low oil prices take a toll on its finances, according to Bassam Fattouh, director of the Oxford Institute for Energy Studies.

"All the producers are feeling the financial pain and the incentive to reach an agreement is stronger," Mr Fattouh said. "The re-balancing process is taking longer than expected."

A pact could give exemptions to countries like Nigeria and Libya to restore output, but without any agreement there would be no restraint on Opec supply. That could swell the global surplus projected for next year by the IEA, a Paris-based adviser to consuming nations.

"If they do not freeze, they risk sending the price into the US$30 to US$40 a barrel range," said David Hufton, chief executive officer of PVM Group in London.