For more than a year, OPEC and its non-OPEC allies have been sticking to their commitment to curtail production in order to help the oil market rebalance. The cartel and friends’ resolve and high overall compliance rate surprised many skeptics who had predicted a quick end to the deal, given OPEC’s patchy track record of sticking to its pledges.
For a thirteenth consecutive month, OPEC and Russia complied with their commitments, and now analysts and investment banks agree that the production cuts have been depleting the global oil overhang at a rapid clip.
While the production cut pact has been a success, there has been growing speculation that the higher oil prices that the production cuts and declining inventories have inspired could unravel the deal, because OPEC and/or Russia could either start cheating or see rising U.S. supply as a threat to prices and market share.
In January, OPEC and Russia kept their commitments to the deal. The cartel increased its production by 20,000 bpd from December to 32.4 million bpd last month, a Bloomberg News survey of analysts, oil companies, and ship-tracking data showed.
Russia, for its part, kept its January production at 10.95 million bpd — basically flat compared to December — as rising production at foreign firm-led projects compensated for small declines at the two major Russian oil producers, Rosneft and Lukoil.
OPEC’s compliance with the cuts last month was 127 percent, according to the Bloomberg survey, while Russia’s was close to 100 percent.
Compliance at OPEC was mostly boosted by the involuntary decline of production in Venezuela, whose oil production dropped by another 30,000 bpd to 1.67 million bpd last month. That was the lowest monthly production since 1989, according to Bloomberg data.
Amid an economic crisis and a cash crunch, Venezuela’s production has only one way to go — down — analysts say, and they don’t expect production to start to recover anytime soon.
Last month, production in Saudi Arabia increased by 60,000 bpd to 10.01 million bpd, but still below the kingdom’s quota under the deal, according to the Bloomberg survey.
Iran booked the second-biggest increase in January, as higher production at oil fields west of the Karoun River boosted its total production by 30,000 bpd to 3.83 million bpd, slightly above its quota.
As for Russia, Dmitry Marinchenko, oil and gas director at Fitch Ratings in London, believes that Moscow is likely to keep its compliance rate close to 100 percent in 2018, “otherwise we may see a domino effect as other countries may also break the deal.”
Still, Russian oil companies may become increasingly nervous about the deal preventing them from ramping up production, the expert noted. If oil prices continue to be well above $60 and the global stockpiles continue to drop, Russian oil firms may see this as an informal sign that the production pact is nearing its end and ramp up drilling as soon as in April or May, Marinchenko told Bloomberg.
As the oil prices hit three-year highs last month, speculation grew that the deal might end earlier, and several banks said they expected a gradual phase-out from the cuts in the second half this year.
A few days later, the Saudi and Russian energy ministers, Khalid al-Falih and Alexander Novak, reaffirmed their commitment to the pact, and even hinted at some kind of cooperation beyond 2018.
OPEC and the Russian-led non-OPEC nations part of the deal will be reviewing the state of the oil market in June, but they are not expected to decide to discontinue the cuts at that meeting.
“It would be surprising to see OPEC ending the cuts deal in June,” Neil Atkinson, Head of the Oil Industry & Markets Division at the International Energy Agency (IEA), said last week.
Still, high oil prices (assuming they stay close to or above current levels of $68 Brent) could be too much temptation for OPEC members, who may find it hard to stick to the deal and refrain from counteracting the expected surge in U.S. shale production.
By Tsvetana Paraskova for Oilprice.com
