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Martin Tillier

Martin Tillier

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OPEC Deal Looks Shaky Despite ‘Good’ Compliance Rate

The oil markets were boosted overnight by the news from the International Energy Agency (IEA) that compliance to the schedule of cuts agreed by OPEC to start on January 1st this year was at record levels. Those unfamiliar with the workings of OPEC may be surprised to learn that those “record levels” are only 90%. Surely, you might think, compliance with something like that, agreed by all the parties to the cut, should be 100%. You may also think that cutting output by “only” 2% would mean that everyone could do their part. If either of these things occurred to you though, you are unfamiliar with OPEC’s history. The last round of cuts, back in 1980 for example, saw only 80% compliance and 2% is the largest reduction ever called for.

As always with OPEC, however, the devil here is in the detail. Overall compliance with cuts is one thing, but what will decide the future of this agreement is the distribution of those output restrictions, and when that is considered the future is not quite as rosy as the market reaction this morning might suggest. Venezuela, for example, who were among the first countries to push for OPEC action have achieved a whopping 18% compliance with their scheduled cuts.

Venezuela, of course is a drop in the bucket in terms of global oil production, and if you could administer truth serum to the other OPEC oil ministers I doubt that any of them really expected the Venezuelans to conform to the agreement. That said…

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