Can OPEC Deal With Its Success?

The 2017 data is in: OPEC’s success with its oil production cuts is now proved. In fact, the cartel and its partners — led by Russia — did so well that there are calls from analysts to consider making it permanent. But … there’s always a but.

It’s no secret that the excellent performance of OPEC and its partners wasn’t exactly excellent across the board. Some members did more than their fair share, and others didn’t hit their quota at all, in any month.

Take the top performers, Saudi Arabia and Venezuela. The former cut more than it had to in order to make up for laggards like Iraq, whose compliance was consistently lower than that of most other members. Venezuela, for its part, also overcomplied, but not by choice. Its oil production dropped sharply in the last couple of years under the pressure of field mismanagement, underinvestment, and U.S. sanctions.

Angola also overcomplied, which helped push OPEC’s total compliance rate above 100 percent last year. This impressed the market and helped crude oil benchmarks break resistance levels and gradually climb to the coveted $60-a-barrel mark. This achievement is all the more impressive in light of the fact that two large OPEC producers — Libya and Nigeria — did not take part in the cuts because they were in active oil industry recovery mode. As a result of this recovery, Bloomberg Gadfly’s Liam Denning notes, they offset one in four barrels that the rest of OPEC took off the market last year.

In total, the 2017 production cut amounted to 438 million barrels — enough to take care of the global overhang. But does OPEC and its partners have what it takes to continue at the same rate? Prices are a particularly good motivator, although as it turns out, prices that are too high are equally as unwelcomed.

When Brent broke the $70 barrier, there was talk that OPEC and Russia might want to wrap things up in June rather than in December for fear shale boomers will, well, boom, undermining their market share.

These worries had a solid basis: Drilling in the United States is indeed booming, and now Canadian drillers are also moving south to respond to the demand for new wells. The U.S. will hit the 10-million-bpd mark very soon: last week, the daily average stood at over 9.9 million bpd. But OPEC’s hands are pretty much tied, because any suggestion of a premature end to the cut deal immediately hits prices. And while this would hurt both OPEC and U.S. drillers, it would hurt OPEC more.

So, OPEC is stuck with the deal, raw as it may be, especially as members such as Saudi Arabia and Kuwait plan hefty oil investment programs for the medium term. These programs require oil prices to remain higher, to which end OPEC will need to continue pumping less as the U.S. pumps more. Of course, there is a good chance that OPEC and Russia will devise a gradual exit strategy that will see the deal end when it is supposed to. There’s also a good chance that it will be extended again because it’s working so well.

By Irina Slav for Oilprice.com