Oil Update: Mixed Results for the OPEC Deal – 2/13/17

OPEC and Russia are leading a push by global producers to end a three-year oil surplus that sent prices crashing and devastated their finances. And while prices initially rallied 20% on news of the OPEC agreement, concerns about rebounding U.S. drillers will fill the gap left by OPEC’s cuts are keeping a lid on prices. Regardless of how increasing U.S. output would make ineffectual any cuts, so far OPEC member compliance with the agreement has been better than expected while compliance from non-members has been weak.

Largest exporter of the group, Saudi Arabia, told OPEC that it cut oil production beyond its obligations under the deal to balance world markets, but independent review suggests otherwise. The kingdom reported that it reduced output by 717,600 barrels a day (b/d) last month, according to a monthly report from the OPEC compared to the group’s own estimates which put Saudi Arabia’s cut closer to a less impressive 496,000 b/d cut.

Saudi Arabia has also violated the spirit of the deal in a more subtle way: reducing domestic use of oil so it has more to sell abroad.

Saudis have always been huge consumers of oil and are only now starting to cut back. That change would allow them to export more while producing less. Oil consumption jumped 77% for Saudi Arabia between 2005 and 2015, topping even China, which grew 72%, according to data from BP.

Now Saudi Arabia’s actual domestic consumption of unrefined crude oil and its increase in production left a combined 3.5 million additional barrels available for refining or export compared with 2015, according to data from the Joint Organisations Data Initiative.

In regards to the group as a whole, in monthly report covering the deal, Iraq, Venezuela and Iran told OPEC they pumped more than allowed by the accord.

OPEC’s “secondary sources” numbers formed the baseline for the accord. Tellingly, Iraq had initially insisted that only statistics supplied by member governments should be used. Iraq’s own data currently shows that it had made 180,000 b/d in cuts of its 210,000 b/d target. Meanwhile, OPEC said Iraq cut 166,000 barrels and the independent International Energy Agency reported that Iraq cut output by only 110,000 barrels a day. 

Among OPEC members, Iraq was always expected to be one of the hardest to reign in. Both the Iraqi and Venezuelan governments are currently unstable (and in need of funds) explaining their reluctance to comply with the cuts that would mean bringing in less oil revenue. Only recently seeing the end of U.S. sanctions, Iran has also made it clear from the start that righting its atrophied energy sector takes precedent over any obligations to the group.

Still, estimates indicate a relatively high degree of compliance among OPEC members compared to deals in the past such as the one in 2009. According to the IEA, OPEC compliance peaked at 80% during the 2009 agreement period.

OPEC, which agreed to the cuts with 11 other oil-producing nations in December, is 92% compliant with its pledge to reduce output by 1.2 million b/d, Oil Minister Essam Al-Marzooq told reporters Monday in Kuwait City. Non-OPEC producers are complying at a lower rate, he said. The IEA reported similar numbers showing a historically high 90% compliance rate.

The same cannot be said for the 11 non-OPEC producers that agreed to join in with output cuts.

Compliance from OPEC members alone was never going to be enough to balance the market. If it were, then the group wouldn’t have had to ask other producers to join the agreement and cut their output by 558,000 b/d. So far, Russia and the other non-OPEC participants have cut just 269,000 b/d, according to IEA data, or compliance of about 48%.

Kuwaiti Oil Minister Essam Al-Marzooq, whose country chairs the committee that oversees compliance, is urging those countries to fulfill their commitments; however, those urgings are probably in vain since OPEC has no means of compelling compliance in any meaningful way.

In addition, the output deal expires in June and though OPEC members have said they will consider extending the cuts if necessary, non-OPEC members have not even suggested they might go along with an extension. With all the trouble, the oil market is still far from being back in balance. If the organization keeps output at January levels, supply would still outmatch demand by about 800,000 a day adding to already bulging global stockpiles.

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