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OPEC splits ranks, agrees on hiking production
June 23, 2018, 2:41 pm

An oil-production reduction deal between members of the Organization for Petroleum Exporting Countries (OPEC) and several non-OPEC petroleum exporters, which came into force from January 2017 and, surprisingly, has been strictly adhered to by all participants, has managed to dramatically alter the international oil market over the past 18 months.

In the year and half since implementation of production cuts, the price of oil has more than doubled, the global oil supply glut has all but evaporated, and, while many oil exporters have strengthened their financial positions, it has left several exporters embroiled by geopolitical and economic constraints unable to meet even their reduced oil production quotas.

It is under these economically volatile and politically charged circumstances that the 174th biannual meeting of OPEC which was held at the organization’s headquarters in Vienna, Austria on Friday, 22 June, decided to raise oil output, but conspicuously left out specific details of who would raise production and by how much.

Speaking at a news conference, following the end of the meeting, President of OPEC and UAE's Energy Minister Suhail Al Mazrouei said that the oil ministers had discussed in depth the positive developments in oil markets and future expectations for the next six months of 2018. The ministers had also studied the report prepared by the Joint Ministerial Monitoring Committee (JMMC), which noted that member states had exceeded the oil production-cut levels by 152 percent in May. In light of these circumstances, the ministers had agreed that it was inevitable but to return to the production-cut levels agreed upon by OPEC at their 171st meeting on 30 November, 2016.

To say that Friday’s meeting was contentious would be nothing short of an understatement. Before going into the ministerial meeting, the two factions and the lines that separated them were clearly drawn. Saudi Arabia and its allies in the Gulf Cooperation Council (GCC) countries had aligned with non-OPEC member Russia in calling for increasing oil production, while Iran, Venezuela, Iraq, Algeria and others in OPEC have been calling for the present production cuts to be maintained, at least until the end of the year.

The diametrically opposed views of the two sides were also succinctly aired in the media days before the OPEC ministerial conference began. On Thursday, Chairman of OPEC’s Joint Ministerial Monitoring Committee (JMMC) and Saudi Arabia’s Minister of Energy, Industry and Mineral Resources, Khalid Al-Falih, said that the JMMC would recommend an increase of one million barrels per day to retain stability in the global oil market and avoid any shortages in the second half of 2018. For his part, the Oil Minister of Iran, Bijan Zanganeh, on arriving in Vienna said that Iran would veto any OPEC agreement that called for raising output.

Friday’s decision by OPEC to raise production, which came after last-minute direct talks between the Iranian and Saudi oil ministers, was no surprise; Saudi Arabia and its allies held the trump cards going into the OPEC ministerial meeting. After all, they were the only ones at the table capable of raising oil production. With the possible exception of Iraq, the others calling for production cuts were already at the threshold of their production or export capabilities. On Saturday, a joint meeting between OPEC and other non-OPEC members is now expected to endorse Friday’s decision, as both Saudi Arabia and Russia, the two oil heavyweights at the joint meeting, have already concurred on hiking oil output.
So where did Friday’s decision leave the ‘production-reduction’ camp? Other than smarting over the imperious Russo-Saudi decision there was little else they could do.

OPEC and their new-found non-OPEC friends had been exceeding their agreed output cuts by the widest margin since the deal came into effect in January 2017. The JMMC, which was formed to monitor adherence by the 14 OPEC and 10 non-OPEC member states to the voluntarily production cuts, had consistently reported that conformity was over 100 percent. In its report on member-states’ compliance for April 2018, the JMMC reported that conformity levels had exceeded 152 percent.

Based on the November 2016 deal by OPEC and non-OPEC members to cut production, the JMMC recommendation of hiking output by one million barrels is expected to bring stability to the oil market. Doing the mathematics, we find that after agreeing to a new production target of 32.5 million barrels per day (mb/d) — by collectively reducing oil production by 1.14mb/d from the October 2016 level of 33.64mb/d — the output by 14 OPEC members in April 2018 of 31.9mb/d was in fact down by 1.74mb/d from the October reference level. When this excess of 600,000 barrels per day are added to the over adherence by the 10 non-OPEC members, the production cuts are over by around 936,000 barrels per day, or roughly the one million barrels that JMMC is recommending should be added back.

It is worth noting that most of this over compliance has come from production limitations in several member states, rather than from any voluntary decrease in output. While it is true that Saudi Arabia had voluntarily cut its production over its pledged levels on more than one occasion, production cuts from several other countries, notably Venezuela, Nigeria and Angola, have been brought about by political and economic constraints, as well as technical difficulties in production and export.

In addition to offsetting the continuous decline in production from states constrained by production limitations, the JMMC report also took into view the fact that oil supplies would be negatively impacted in November, when the proposed US sanctions will come into effect and curb Iranian oil exports. Friday’s ambiguous decision on the exact figures of production hikes could lead to oil gaining in the short-term but once the proposed million barrels per day start materializing prices are expected to stabilize over the long-term.


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