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OPEC Production Cuts: Here’s The Cheat Sheet

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OPEC will present its Monthly Oil Market Report on the 18th of January, at a time when OPEC and non-OPEC members are making their first production cuts in line with the 30th of November deal—the first cut deal in eight years. Four days later, on the 22nd of January, a committee of the world’s largest producers will meet in Vienna to hash out how to monitor compliance with the deal and make sure no one is cheating.

In the meantime, the world is watching closely and hanging onto every statement about production cuts.

So far, this is where we stand:

Saudi Arabia: Leading By Example

The Saudis are responsible for about 40 percent of the total pledged cuts, so this is the key arena to watch—and it’s also where the market will respond most vociferously to new numbers.

Saudi Arabian Energy Minister, Khalid Al-Falih, late last week confirmed that the country had reduced oil production to less than 10 million barrels a day. This is lower than the pledged amount of 10.05 million barrels. For now, this brings Saudi output to its lowest in 22 months.

The Saudis are keen to show that they are listening to the market, and they are also hoping to lead by example and get other OPEC and non-OPEC members to follow suit. The Kingdom said that it is planning even deeper cuts in February.

The Saudis produce medium and heavy crude, and in order to both take the sting out of cuts in terms of revenue and simultaneously help balance the market, the Kingdom will cut production of its heavy crude, which is less profitable thanks to the spread between light and heavy crude widening significantly over the past couple of years. This is how Saudi Arabia has handled it historically.

Iraq: Where Cuts Get Complicated

Home to the second largest oil reserves, things are more complicated for Iraq, which has obligations to supermajor international oil companies, and renegade producers in the form of the Kurdistan Regional Government (KRG), which may or may not play along with the cuts.

As part of the 30 November deal, Iraq pledged to cut 210,000 barrels a day to 4.35 million barrels a day starting in January. So far, Iraqi officials say the country has reduced production by 160,000 barrels per day, but there are no details on where these production cuts have been made, not to mention that it’s tough to verify, because based on export figures, there appears to have been no reduction at all.

For February, Bloomberg notes, Iraq is on track to ship 3.64 million barrels per day of crude from its southern Basra ports. That’s more than it exported in December, when crude exports averaged 3.51 million barrels per day, representing a record high even then. Indeed, none of Iraq’s big producers—including Exxon, Shell, and BP—have reported any significant reduction in production, and if they’re not cutting then it is unclear where the cuts are coming from, because more than any other country, Iraq’s oil is in the hands of international supermajors.

The market shouldn’t be looking to Iraq to follow Saudi Arabia’s lead, exactly. The Saudis control their oil production fully, so it is easier for them to implement production cuts.

While the Kurds may cause a bit of a problem in terms of cuts, the bigger problem lies with the bigger share of Iraqi oil; that is, with the international oil companies, with whom Iraq has contractual commitments in the big oilfields in the country’s south. Those contracts require the Iraqi government to compensate the oil companies when production is curtailed for reasons that are beyond the control of the driller, according to Reuters.

Iran: Exports Set To Fall Despite OPEC Exemption

Iran isn’t cutting because OPEC exempted it from the deal, allowing it instead to increase production by 90,000 barrels per day as Tehran strives to reach its pre-sanction output levels of 4 million barrels per day. Related: Canada’s Oil Industry Goes On The Offensive

It’s hard to get detailed information on production out of Iran because it does not publish monthly data on condensate and crude exports, but private sources have told news agencies that Iranian condensate exports are actually set to fall 17 percent in January, hitting a five-month low. Loadings of condensate in January are set to reach about 385,000 barrels per day (bpd), down from an estimated 462,000 bpd in December.

Russia: On Track For Production Cuts

Russia says it has begun cutting as well, in line with its commitment to reduce output by 300,000 barrels per day. According to Moscow, oil output was reduced in the first 10 days of January by an even larger amount than had been planned—but again, details are sparse. And we also have to consider that Russia was using its November oil production—the highest in 30 years at 11.21 million barrels per day on average—as its baseline when it made the output cut deal with OPEC.

United States: The Shale Recovery Continues

The United States’ shale producers, while not part of the production cut agreement, should be considered in this equation. Last week, data from the Energy Information Administration (EIA) showed a 176,000-barrel-per-day increase in U.S. production from the previous week. This was the biggest increase since May 2015.

It would seem logical that U.S. shale producers would take full advantage of the pending market rebalance, but that is not exactly what’s happening. The U.S. shale rebound started before the OPEC deal; in fact, it started when no one even believed that the OPEC deal was feasible. The deal, though, should boost this further.

While the EIA anticipates that U.S. production for December 2017 could reach 9.22 million barrels a day by December, an increase of 320,000 barrels per day for the year, this could quickly start to look like a conservative forecast.

Cuts in other Countries:

• Kuwait

Oil Minister Essam Al-Marzouk said that Kuwait has cut 133,000 barrels a day of oil output and is producing 2.7 million barrels a day. Promised cuts were 131,000 barrels per day.

• UAE

The United Arab Emirates will reduce output by 139,000 barrels a day.

• Venezuela

In December, Venezuelan Oil Minister Eulogio Del Pino said the country would cut 95,000 barrels per day of oil production in the New Year under the OPEC deal. On the 16th of January however, President Maduro claimed that he would soon be circulating details of a new plan to stabilize oil prices, refusing to elaborate any further.

• Algeria

Algerian Energy Minister Boutarfa has confirmed that Algeria has started cutting and will reduce its output in January by 60,000 barrels a day.

• Ecuador

Ecuador agreed to limit production to 522,000 barrels per day, with its compliance largely coming in the form of reduced enhanced recovery at its mature fields to allow production to decline naturally.

• Angola

Angola has its oil production set at 1.673 million barrels as a maximum, according to state-run Sonangol. This means Angola is cutting around 87,000 barrels per day off a reference basket of 1.751, which caps production at 1.673 million barrels per day for the next six months.

Nigeria and Libya: where production is set to rise

Angola’s loss is Nigeria’s gain going forward. The two have been vying for the top African oil producer slot, which Nigeria had lost to stoppages resulting from Niger Delta militancy. It’s now getting that somewhat under control, but Angola’s cuts will likely seal the deal for Nigeria, which is exempt from the OPEC deal. Related: Five Energy Predictions For 2017

After experiencing a loss of 700,000 barrels per day of production due to militant attacks on the Nigerian oil infrastructure in the Niger Delta in November, Nigeria managed to increase output by nearly 300,000 barrels per day, bringing production up to 1.8 million barrels per day according to OPEC direct communication figures.

For Libya, the saving grace of its oil production has been the retaking of key oil installations by the Libyan National Army (LNA), led by General Haftar. The freeing of these export terminals has allowed exports to resume, along with production.

Libya’s production is now close to 700,000 barrels per day, and is eyeing 900,000 barrels per day within the next few months, but the target is 1 million barrels per day by the end of this year.

The real oil output cut report card won’t come until after a mechanism for monitoring is put in place later this month. At the 22 January meeting in Vienna, chaired by Kuwait, major OPEC and non-OPEC producers will decide what the acceptable level of compliance will be. They will also start discussing whether the deal will be extended beyond June— with a final decision expected in Vienna on the 25th of May.

By Damir Kaletovic for Oilprice.com

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Leave a comment
  • Rick on January 17 2017 said:
    Those cuts sound underwhelming
  • jman57 on January 21 2017 said:
    I don't believe any of them. OPEC's MOMR report for January contains a major math error that vastly underestimates their December output by 400K b/d. Why are they only meeting now to talk compliance? They could have done that in November. This is more PR hype designed to keep up the price of oil while they INCREASE production.

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