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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Analysts See OPEC Compliance Erode In H2 2017

OPEC

OPEC’s compliance with the output cuts will continue to slip in the second half this year, despite recent rhetoric reiterating the cartel members’ commitment to stick to the production quotas, according to JP Morgan.

“More positive overtures from the Saudi Arabian and Iraqi Energy Ministers on their respective commitments to the agreed cuts helped bolster market sentiment on the outlook for prices,” JP Morgan said in a note, as quoted by the Trend news agency.

At the beginning of last week, OPEC held a meeting with some of the producers and cited its members Iraq and the UAE, as well as non-OPEC signatories to the deal Kazakhstan and Malaysia, as laggards in compliance. OPEC however added that they “all expressed their full support for the existing monitoring mechanism and their willingness to fully cooperate.” 

The jawboning continued when Iraqi oil minister Jabar al-Luaibi visited Saudi Arabia last week to speak to Saudi oil minister Khalid al-Falih. Talks were centered around “the need to intensify efforts to urge all parties to strengthen their commitment to the agreement to reduce production, to maintain the balance of global energy markets,” al-Falih said.

Just two weeks before Saudi Arabia chastised Iraq and other non-compliant members, al-Luaibi said that Iraq’s crude oil output could hit 5 million bpd by the end of the year, adding that these projections “will not be affected by any fluctuations”.

According to JP Morgan, “Previous comments from Jabbar Al-Luaibi, in mid-July, offered the prospect of Iraq increasing output to 5 million barrels per day by the end of this year, some 65,000 barrels per day over its production target. It is hard to reconcile both stated aims of the Iraqi government, but our assumption remains that OPEC member compliance with agreed production cuts will fade over the course of 2h’17.”  

Despite the “whatever it takes” rhetoric coming from OPEC, Saudi Arabia and other cartel members appear to have little appetite for deeper cuts, according to JP Morgan. 

Shortly after OPEC extended the cuts into March 2018, JP Morgan was the investment bank that made the most drastic cut to its oil price projections, expecting not only U.S. shale to continue roaring back at OPEC, but also the cartel’s deal falling apart by the end of this year. Related: These Major Oil Buyers Are Quietly Prepping For A Supply Shock

JP Morgan slashed its 2018 WTI forecast by US$11—from US$53.50 to US$42.

The latest monthly oil market report by the IEA showed that OPEC compliance slipped to 75 percent in July, from 77 percent in June.

Compliance within the non-OPEC group of producers party to the cuts was 67 percent. All 22 producers that have committed to cut production are overproducing a combined 470,000 bpd above their quotas.

“There would be more confidence that re-balancing is here to stay if some producers party to the output agreements were not, just as they are gaining the upper hand, showing signs of weakening their resolve,” the IEA said in the report.  

By Tsvetana Paraskova for Oilprice.com

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