Cheats could rain on OPEC’s plan to push cuts past 2018

The Organisation of Petroleum Exporting Countries (OPEC) and non-members including Russia and Oman are looking extend a supply cut of 1.8 million applied to global production in 2016 to stay past December 2018 in a bid to rebalance oil markets but achieving this depends on how much it checks cheats.

The OPEC/Non-OPEC Joint Ministerial Monitoring Committee (JMMC) convened in Muscat, the Sultanate of Oman, for its seventh meeting, on 21 January 2018 and announced that it was recording huge success in the deal.

“Based on the Report of the Joint Technical Committee (JTC) for the month of December 2017, following continuous months of excellent performances, OPEC and participating non-OPEC countries have achieved a record-breaking conformity level of 129 percent with their voluntary production adjustments. The monthly average conformity level for the first year of the Declaration of Cooperation was a remarkable 107 percent,” said a release from OPEC.

The JMMC was established following OPEC’s 171st Ministerial Conference Decision of 30 November 2016, and the subsequent Declaration of Cooperation made at the joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting held on 10 December 2016 at which 11 (now 10) non-OPEC oil producing countries cooperated with the 13 (now 14) OPEC Member Countries in a concerted effort to accelerate the stabilization of the global oil market through voluntary adjustments in total production of around 1.8 million barrels per day.

The resulting Declaration, which came into effect on 1 January 2017, was for six months. The second joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting, held on 25 May 2017, decided to extend the voluntary production adjustments for another nine months commencing 1 July 2017. At the third joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting, held on 30 November 2017, it was agreed to amend the Declaration of Cooperation so that it will take effect for the entirety of 2018.

However if the group succeeds in its objective to curb production till the end of the year, it would need to work harder to convince countries like Iraq and Kazakhstan to keep production to agreed levels.

Iraq pumped about 80,000 more barrels of oil a day than permitted by the group during the first quarter of 2017. If that deal gets extended to 2018, the nation will have even less incentive to comply because capacity at key southern fields is expanding and three years of fighting Islamic State has left it drowning in debt.

But Iraq is not the only culprit. According to recent OPEC monthly oil market report, oil production from Kazakhstan likely increased by 180,000 bpd in 2017 to 1.74 million barrels per day. This gives Kazakhstan the unenviable accolade of being the most out-of-compliance producer in the OPEC / NOPEC production cut deal, surpassing even Iraq.

Kazakhstan committed to cutting production by 20,000 bpd as part of the supply cap deal. The country did not see exports drop within the period, rather exports last year of Kazakh CPC blend and Batumi crude increase by over 200,000 bpd.

Export loadings outpaced year-ago levels every month last year except January. The current year has started on the front foot; export loadings so far in January reflect ongoing strength.

The risk for OPEC is how to ensure full compliance and ensure that other countries do not join the fray. If other members start cutting corners too, the prospects of rebalancing the markets could prove quite difficult and erode gains made by the current rally.

ISAAC ANYAOGU