OPEC is doing a surprisingly good job—at least initially—in complying with its promised output cuts, recent reports by international agencies and the cartel itself show. OPEC’s largest producer and de facto leader Saudi Arabia is going the extra mile in cutting even deeper than the hefty oil-reduction amount it had pledged.
The cartel members seemingly have one strong incentive to initially stick to cuts: strained budgets that have been suffering from the lower-for-longer oil prices. At oil above $50 per barrel – the price floor which OPEC’s deal has put into place since it was announced – OPEC economies would be getting more export revenues this year compared to last year, say in February, when crude prices had crashed to $30 per barrel.
The flip side is that OPEC producers would be tempted to pump and export more at those higher prices.
The question surrounding all OPEC production cuts is, when will the deal fall through and who will be the first to cheat.
The latest data by the International Energy Agency (IEA), S&P Global Platts, and OPEC itself suggest that compliance in January was 90 percent or higher, with Saudis putting in extra efforts to cut more than promised.
Still, even if it’s to show that it’s ‘leading by example’, Saudi Arabia’s first and foremost thought is hardly to cover for non-compliance by other OPEC members. It may very well be cutting so deep initially in order to set the stage for increases when domestic seasonal demand starts to grow with the coming of the summer, and safely say it is sticking to its pledge to keep the average supply cut spread over the six-month deal period. Related: Oil Prices Head Lower In Spite Of Bullish OPEC Data
As Bloomberg Gadfly’s Julian Lee argues in a recent piece, the Saudis will have to ramp up production when domestic demand rises, so as to avoid cutting much from exports. The beginning of the pick-up in Saudi domestic demand is April-May.
According to the IEA, Saudi Arabia burns through roughly 900,000 barrels per day during the summer months and is the largest consumer of oil for electricity generation.
This means that Saudi Arabia may use deeper-than-pledged and expected cuts in January and February, and still claim they are committed to and complying with the OPEC deal over the six-month period.
In light of this, it would come as no surprise that Saudi Arabia overcomplied with the cuts. According to OPEC’s secondary sources, the Saudis cut 496,200 bpd from December to 9.946 million bpd in January, the month in which the supply-cut deal took effect. According to what Saudi Arabia directly reported to OPEC, it had cut production by an astonishing 717,600 bpd to 9.748 million bpd.
In comparison, Saudi Arabia self-reported November and December output very close to the volumes that OPEC’s secondary sources have estimated.
OPEC’s secondary-sources figures for January also show that the close Saudi Gulf Arab allies – Kuwait and the UAE – are also cutting more, although the UAE’s 2.931 million bpd output in January is still above the 2.874 million bpd level set out in OPEC’s agreement.
Venezuela and Algeria were also slightly above the production level set in the November deal, and Iraq was not complying by around 125,000 bpd. Then there are the three special cases not subject to cuts – Libya, Nigeria and Iran – which all raised their production. The political situation in Libya and Nigeria permitting, those two producers would raise their respective output in coming months, which would further complicate the task for the other OPEC members. Related: Mafia, Guns And Clans: The Big Libyan Oil Heist
Even with the record compliance rate in January, OPEC’s output – if the cartel keeps last month’s production - would still be 800,000 bpd a day more than what the market actually needs, Bloomberg estimates show.
The cartel’s only win in the deal so far has been reducing the volatility of oil prices -- the recurring mantra of Venezuela’s socialist leader Nicolas Maduro.
Oil prices are stuck in the $50-55 band, capped by the resurgence of the U.S. shale patch. The number of oil rigs in the U.S. has increased by 114 since OPEC announced the deal to curb supply. U.S. production is expected to rise by another 80,000 bpd in March compared to February, with the Permian contributing the most to the increase and offsetting lower output in the Bakken and Utica, the EIA’s latest Drilling Productivity Report showed on Monday.
At this point, OPEC has no useful moves except for reporting its ‘strong commitment’ and ‘extraordinary support’ to the cuts, and waiting until May to try to talk oil prices up again with discussions about whether the six-month deal should be extended.
By Tsvetana Paraskova for Oilprice.com
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