Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Saudi Arabia is having problems herding cats.

The felines in this case are the countries making up the Vienna Group, which agreed to cut oil production to support prices. This strategy hasn't been terribly successful thus far, despite most of the 24 countries involved delivering on their promises, more or less. Brent crude oil is now roughly where it was before the agreement was announced in November and 10 percent below where it was when the cuts were extended in late May.

Cut And Run
Supply cuts by some OPEC countries and other oil exporters haven't done much for prices
Source: Bloomberg

The pain of those low prices led one of the cats to call it quits on Tuesday. Ecuador, which is implementing an austerity plan and struggling to clear a $1.1 billion backlog of unpaid pensions, said it can't continue to forgo the revenue lost from cutting a nominal 26,000 barrels a day as part of the agreement. At current prices, that's worth about $465 million a year.

Now, as Ecuador's oil minister said when announcing this, “What Ecuador does or doesn’t do has no major impact on OPEC output.” That is true in strict mathematical terms.

Bit Part
Ecuador accounts for just 1 percent of the Vienna Group's agreed output cuts
Source: Bloomberg News, Bloomberg Intelligence

But we're beyond strict math at this point.

Saudi Arabia's own oil minister, Khalid Al-Falih, has been relying more on the power of rhetoric, with a central banker-like promise to do "whatever it takes" to clear the glut of excess barrels weighing on prices.

It is telling that, not long after Ecuador announced it was cutting loose, a report surfaced that Saudi Arabia was considering a unilateral reduction in exports of a further 1 million barrels a day. This would help offset this year's surge in Nigerian and Libyan production, two sick cats exempted from the original agreement but now being called upon to do their part, too.

Yet this is exactly the situation Saudi Arabia wanted to avoid.

The whole point of getting other countries to join with OPEC's cuts -- Russia, in particular -- was to reassert the cartel's powers of persuasion in the futures market and make sure Saudi Arabia didn't have to act as cutter of last resort (it could, after all, use the money to help ease the pains of its rather ambitious reform program.)

Besides Libya and Nigeria, Iraq is another concern. Producing 4.4 million barrels a day, the country's compliance with its agreed cuts has slipped from more than 80 percent in April to less than 30 percent. Meanwhile, tensions are high within OPEC's core, the Gulf monarchies engaged in a tense face-off with Qatar.

Ecuador may be a kitten in the grand scheme of things. But its departure, and the (perhaps coincidental) signal that Saudi Arabia might shoulder even more of the burden encourages moral hazard in a group that hardly needs encouraging.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net