The OPEC+ oil-production agreement – all’s well that ends well

Saudi Arabia and Russia are said to have favored extending the current reduction of 7.7mln bpd into the first few months of 2021

The OPEC logo is seen outside their headquarters in Vienna, Austria, October 24, 2016.

The OPEC logo is seen outside their headquarters in Vienna, Austria, October 24, 2016.

REUTERS/Leonhard Foeger
The members of OPEC+, an alliance of the 13 OPEC countries and 10 cohorts led by Russia, on Thursday announced they had reached a compromise in their discussions about changes to oil production levels in the coming months.

Saudi Arabia and Russia are said to have favored extending the current reduction of 7.7 million barrels per day (bpd) into the first few months of 2021. Several other countries reportedly opposed an extension and wanted to reduce the cuts to 5.8 million bpd, as agreed in April.

In the end, the 23 countries agreed to taper the cuts by 500,000 bpd in January and then decide the future trajectory on a monthly basis. Countries that overproduced in previous months were given until the end of March to make compensatory cuts, which equates to an extension of three months.

The discussions were reportedly tense and the OPEC+ ministerial meeting had to be delayed from Tuesday until Thursday to line up all the “ducks in a row.”

As recently as the beginning of November, an agreement to extend the current level of production cuts for a few months had looked more feasible. Then came the hope for early approvals of coronavirus (COVID-19) vaccines, rising stock markets and an oil price rally that lasted for four weeks, which did little to help cohesion among the group.

The UAE reportedly questioned the validity of adhering to quotas or compensating for overstepping them while some countries overproduced and failed to compensate. Iraq and Nigeria are said to feel that a “one size fits all” approach to cuts is unfair, given their internal problems.

Achieving cohesion among such a disparate group is easier when the sword of Damocles — in the form of floundering demand and the potential for prices to fall off a cliff — is hanging over its members. It is harder when the demand picture looks really good east of Suez, and vaccines might soon start to provide respite west of Suez. The fact that decisions in the alliance need to be unanimous further complicates matters.

The problem, however, is that vaccines are still a thing of the future while restrictions and lockdowns west of Suez are a thing of the present, as the virus continues to rip through countries influencing demand here and now. On top of that, Libya added an additional million-plus bpd onto the market after Khalifa Haftar ended his blockade of oil installations. Libya, Iran and Venezuela are exempt from the OPEC+ production cuts.

In the final analysis, adding 500,000 bpd in January might not be as ideal a decision as extending the full 7.7 million bpd of cuts for several months — however, it does more for markets than would have been the case if an additional 1.9 million bpd had hit the markets in January as previously planned.

The monthly reviews make sense in terms of adjusting to market developments in real time. During the announcement on Thursday, Saudi Energy Minister Prince Abdul Aziz bin Salman stressed that it is important to be responsive to the market, and so a monthly assessment is the only way forward given the uncertainties surrounding the spread of the virus.

The oil markets liked the announcement, with WTI rising by 1.75 percent in the aftermath and Brent by 1.9 percent.

The members of OPEC+ had to compromise and they did: everybody would have suffered if an inability to reach an agreement had led to a price collapse — which was a possibility, given the short-term demand outlook west of Suez and the additional barrels produced by Libya.

The deliberations leading up to the meeting, as well as the hard-fought compromise, have taught us three things. Firstly, the UAE is becoming more assertive. ADNOC has aggressively added capacity over the past few years, of which it would like to avail itself. (This is reminiscent of the situation a few years ago when Rosneft chief Igor Sechin put pressure on Russian President Vladimir Putin not to put shackles on newly created production capacity in the nation’s oil industry.)

Secondly, several smaller, yet still substantial, producers, such as Iraq and Nigeria, resent the “one size fits all” approach to production cuts and feel their internal circumstances should be afforded more consideration.

Thirdly, Saudi Arabia and Russia are marching in lockstep, which is important. Everyone remembers what happened when they failed to agree in March and embarked on a production war. One month later, the price of WTI went negative for a day or so.

Since April, Saudi Arabia has meticulously adhered to its quota — and even made additional cuts above and beyond this when required. Russia has at times exceeded its quota. Prince Abdul Aziz had a point, however, when he stressed that despite some overproduction by some countries, overall compliance by members of the alliance has been high, above 95 percent throughout.

Saudi Arabia has meticulously adhered to its quota — and even made additional cuts above and beyond this when required.

Cornelia Meyer

In the end, the organization reached a compromise and this is important because it was a unanimous decision. It is also important that Prince Abdul Aziz and Alexander Novak, now Russia’s deputy prime minister and formerly the country’s energy minister, remain co-chairs of the Joint Ministerial Monitoring Committee, because this will ensure its efficacy.

The next few months will not be easy, as market sentiment swings between hopes for the effect of vaccines in the near future and concerns about demand destruction in the present as the virus continues to cause havoc, particularly west of Suez.

Expect volatility, which will be the result of fundamentals much more than any monthly uncertainty over the next steps of OPEC+. The organization will be monitoring the market closely.

  • Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources
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