Riyadh likely to push for continued oil output restraint

Sunday 02/04/2017
Saudi Energy Minister Khalid al-Falih gestures during last June’s OPEC oil ministers meeting. (AP)

Washington - The members of the Or­ganisation of the Petrole­um Exporting Countries (OPEC) and independent producers that joined forces in December to remove large volumes of oil from markets for six months will soon decide on a 6-month extension, with Saudi Arabia pushing for the continua­tion of output restraint.
Faced with financial ills and a packed economic agenda, Riyadh apparently believes that extending the agreement could help balance global supply and demand and push up oil prices.
An extension is not necessarily a fait accompli, however, and will face strong headwinds should the kingdom demand that OPEC mem­bers Iran and Iraq toe the line. Ri­yadh also needs symbolic partici­pation from Russia, which has been largely non-compliant.
The December agreement pulled nearly 1.8 million barrels per day (bpd) of crude oil from global oil markets at the start of 2017 and left a potential 6-month extension on the table. The accord called for OPEC members to slash combined production by 1.2 million bpd and for the group of independent pro­ducers to make 558,000 bpd in cuts. The producers were allowed to average their output reductions over the course of the 6-month pe­riod.
OPEC ministers are to meet May 25th in Vienna to formally decide whether to extend the production cuts through the end of the year.
Three months into the accord, results are mixed. At face value, compliance from OPEC has been remarkably robust, with the 11 OPEC members that are participat­ing exceeding pledged cuts in Feb­ruary to reach 106% compliance. Together OPEC and independent producers reportedly executed 94% of their committed cuts in February, up from January’s 86% compliance.
As good as that collective com­pliance sounds, it masks the fact that non-OPEC independent pro­ducers are falling far short of their prescribed reductions, with their compliance levels reaching 64% in February, down from 66% in Janu­ary. That 106% compliance from within OPEC can be attributed to one member — Saudi Arabia, which has filled the gaps left by errant producers that have fallen short by trimming its own output far deeper than its official reduction level.
As part of the December agree­ment, Saudi Arabia accepted a steep output cut of nearly 500,000 bpd to demonstrate to oil markets, fellow OPEC members and inde­pendent producers its commit­ment to see oil prices restored to higher levels. Riyadh, however, has had to resort to extreme measures, with its output reportedly down 770,000 bpd in February from pre-agreement levels.
Saudi Oil Minister Khalid al-Falih has indicated that OPEC would like­ly extend the collective production cuts beyond June if oil stockpiles held by Organisation of Economic Co-operation and Development (OECD) countries remained above the 5-year average.
Since trimming the world’s wealthiest countries’ oil stocks to that average before the group’s ministerial conference at the end of May would be a massive and im­probable undertaking, Riyadh is ar­guing for an extension.
If Saudi Arabia truly wants to extend production restraint from OPEC and non-OPEC countries for another six months, the question is how far Riyadh will go in demand­ing cooperation from Iran and Iraq, and pressing Russia on its lacklus­tre compliance.
Iran avoided taking part in the current 6-month accord, arguing that it was in the process of recov­ering its oil production and econ­omy following years of sanctions. Because Riyadh was desperate to lock in a substantive deal between OPEC and independent producers, it gave Tehran a pass. This time the Saudis may not be as accommodat­ing.
With the heightened political animosity between the two Gulf neighbours, Iran will likely resist Saudi demands to accept a pro­duction cut as part of an exten­sion deal. Iranian Oil Minister Bijan Zanganeh has stated that Tehran would be willing to maintain its current output of about 3.8 million bpd for the remainder of 2017, giv­ing the appearance of an Iranian concession but, in fact, conceding nothing.
Iraq has failed to meet its ob­ligation of cutting 210,000 bpd from pre-agreement levels and maintain an average output level of 4.35 million bpd during the current 6-month period. Perhaps more worrisome to Riyadh is Iraq’s declared goal of reaching approxi­mately 5 million bpd of production by mid-year, as indicated by com­ments from Iraqi Oil Minister Jab­ber al-Luaibi.
The largest independent produc­er, Russia, has not trimmed its pro­duction by an average of 300,000 bpd as promised. Its participation in a 6-month rollover is in doubt, given Russian energy giant Ros­neft’s complaints that other Rus­sian producers have not followed its example in carrying out pledged reductions.
However, even if Riyadh thinks Russia is not pulling its weight, it needs Moscow’s participation to secure the cooperation of other in­dependent producers in a rollover deal.