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Neva-ending Story: Russia, OPEC Raise Prospekt of Continued Market Management in St. Petersburg Reports of the "death of the deal" are exaggerated, for the moment

Having met in St. Petersburg this Thursday (24th May), Reuters is now reporting that Russia and Saudi Arabia may be prepared to organise a coordinated production increase of up to 1 million b/d. There is apparently some friction over the full size, with the Kingdom wanting a figure more like 300,000 b/d, while Russia prefers a larger number. Both appear to agree on the need to provide more production to cover shortages from Venezuela, Angola and, in the future, Iran and prevent high oil prices destroying demand.

But there also seems to be agreement that the bulk of increases must come from the OPEC side of the deal – in line with our previous analysis here and our latest Oil Market Snapshot here. As the excess losses (as well as the bulk of agreed cuts) are with OPEC, in the form of Venezuelan and Angolan production issues, so OPEC must provide the bulk of the remedy. Doing so may be easier said than done – the downturn has led to a lack of investment and has attrited spare capacity, while the agreement already allowed Nigeria and Libya to grow as much as they have been able to.

With the interestingly stated aim being to “reduce compliance to 100%,” we still hold to our view that calling this the end of the deal is premature. The key actors – Saudi and Russia – are still using the terms of the deal as a referent, and also seem keen to apportion production growth in a manner that will maintain cooperation. According to our calculations from our Oil Market Snapshot report, OPEC is currently 166% compliant using its preferred measure. Actual production cut by those nations with targets (which includes Iran) totals 1.939 million b/d, while commitments to cut only total 1.164 million b/d. This leaves 775,000 b/d of headroom to grow production while still retaining compliance. The fact that a) Iran’s target under the agreement is actually to grow production and b) sanctions are expected to see Iranian production fall in any case makes compliance with the original terms of the deal using OPEC’s preferred measure easier, rather than harder.

Reference Production Level Agreed Cuts April Production (secondary sources) Cuts in April vs Reference level Average (Jan17-Apr18) Member Compliance (Jan17-Apr18) Member Compliance (April only)
S. Arabia 10.544 0.486 9.959 0.585 9.962 119.74% 120.37%
Iraq 4.561 0.21 4.429 0.132 4.435 59.79% 62.86%
UAE 3.013 0.139 2.872 0.141 2.892 86.92% 101.44%
Kuwait 2.838 0.131 2.705 0.133 2.706 100.48% 101.53%
Venezuela 2.067 0.095 1.436 0.631 1.813 267.50% 664.21%
Angola 1.751 0.078 1.515 0.236 1.619 168.99% 302.56%
Algeria 1.089 0.05 0.997 0.092 1.036 105.75% 184.00%
Qatar 0.648 0.03 0.590 0.058 0.604 145.63% 193.33%
Ecuador 0.548 0.026 0.520 0.028 0.526 82.93% 107.69%
Gabon 0.202 0.009 0.183 0.019 0.198 47.92% 211.11%
Iran 3.707 -0.09 3.823 -0.116 3.811 115.28% 128.89%
Libya 0.528 0 0.982 -0.454 0.859
Nigeria 1.615 0 1.791 -0.176 1.710
Total 33.111 1.164 31.823 1.309 32.212
OPEC-13 Ceiling 31.75 1.361
April vs OPEC ceiling Jan-Apr average vs OPEC ceiling April vs targets Jan17-Apr18 average vs targets Average of member compliance (Jan17-Apr18) Average of member compliance (Apr)
Compliance 96.18% 69.30% 166.58% 117.23% 118.27% 198%

This does not preclude the signatories re-apportioning members’ targets to keep countries accountable to other signatories, however. Nor does it prevent a radical renegotiation of the deal going into 2019, after this initial deal expires, to react to changes in the market. Both processes will involve intensive negotiation heading into OPEC’s June 22nd meeting and beyond. But we should expect coordinated market management to remain a fixture for some time to come yet – both for production cuts and growth.

by Graham Walker // 25 May, 2018

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