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Is OPEC’s Compliance to the Production Cut Deal Declining?

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Updated

OPEC’s crude oil production  

A Reuters survey showed that OPEC’s crude oil production declined by 70,000 bpd (barrels per day) to 32 MMbpd (million barrels per day) in May—compared to the previous month. OPEC’s production was at a 13-month low. The production declined due to lower production from Venezuela, Nigeria, and Libya. The decline from these countries wasn’t intended along the lines of self-imposed caps.

Nigeria and Venezuela’s production declined by 90,000 bpd and 50,000 bpd, respectively, in May—compared to April. These countries had the highest production decline among OPEC members during this period. Saudi Arabia and Iraq’s production rose by 60,000 bpd and 50,000 bpd in May. These countries had the highest production increase among OPEC members during this period. These are the two largest producers in OPEC. A rise in their production doesn’t bode well for the production cut deal.

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Supply cuts  

OPEC producers and Russia decided to cut the oil production by 1,800,000 bpd from January 2017 to December 2018. Brent and US oil prices have risen ~68% and ~52.2% since June 21, 2017, partly due to current production cuts.

The iShares Global Energy ETF (IXC) has increased ~24.2% since June 21, 2017. IXC targets to follow an index of global equities in the energy sector. Ecopetrol (EC), Neste Oyj (NESTE.HE), Valero (VLO), and Santos (STO.AX) account for ~2.7% of IXC’s holdings. These stocks have risen ~156%, 102%, ~99%, and 97.6%, respectively, since June 21, 2017. These stocks were the top percentage gainers in IXC’s holding during this period. 

Impact 

OPEC had 163% and 166% compliance with the supply cuts in May and April, respectively. A lot of the excess compliance is due to unintended production outages. So, the decline in OPEC’s compliance with the supply cuts, driven by major producers, could have a negative impact on crude oil prices.

Saudi Arabia and Russia expressed interest in higher crude oil production once new sanctions are implemented on Iran and Venezuela.

OPEC’s next meeting is scheduled on June 22. Any bearish comments related to a rise in production from these countries could pressure oil prices.

Next, we’ll discuss Iran’s crude oil production.

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