OPEC Seeks to Quiet Doubts on Supply Cuts as Rally Faltersby
Skeptical market awaits proof compliance committee has teeth
Russia broke pledge in last deal, and OPEC didn’t fully comply
When OPEC and Russia meet this weekend to gauge progress on their oil-supply deal, they’ll be trying to dispel the shadow of previous unfulfilled promises.
Oil prices rose 20 percent in the month after OPEC agreed to cut output, reaching $54.06 a barrel in New York on Dec. 28. Since then, they’ve slipped almost 5 percent as traders, with one eye on rising U.S. shale production, await proof that OPEC and other producers will live up to their deal. They recall how Russia broke its pledge during cutbacks in 2008, while some members of the producers group failed to fully implement the agreement.
The solution: The dealmakers have created a panel to verify the cuts, a five-nation group with both OPEC and non-OPEC members that will meet Jan. 22 in Vienna. While some see this as an impressive indication of intent in the midst of a two-year price rout, others worry the group is only now trying to establish how compliance will be assessed.
“Is this a committee in name only or is it actually going to have a strong voice?” said Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University in New York. Can it “publicly name and shame countries that overproduce? It’s really going to depend on how they actually set it up.”
Before OPEC even removed a single barrel from the market, its decision alone sent shock waves through the oil market, changing the shape of what’s called the forward curve. Near-term prices moved up on expectations on tighter supply, while later contracts fell as producers rushed to hedge their output.
West Texas Intermediate for February delivery was trading at $51.51 a barrel at 11:13 a.m. in New York.
Several members of the Organization of Petroleum Exporting Countries say they’ve already made their pledged reductions, with Saudi Arabia, Kuwait and Algeria saying they’ve cut even deeper. With January data not yet complete, the first meeting of the monitoring panel will focus mostly on how compliance will be assessed rather than producing any new data, said one delegate who asked not to be identified.
Some remain skeptical. “OPEC is going to yet again over-promise and under-deliver,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, in a Bloomberg television interview. “We are going to get cheating from OPEC; we’re going to get false information.”
Some analysts, though, say OPEC has little choice going forward, given the economic damage incurred on the group’s members during the price rout. In Venezuela, for instance, oil accounts for all but 5 percent of foreign currency earnings. In 2016, those earnings fell by 87 percent, President Nicolas Maduro said in a Wednesday news conference in Caracas.
“The reward is so big that I believe they will be more respectful than they have been in the past,” said Paolo Scaroni, vice chairman of NM Rothschild & Sons Ltd. and former chief executive officer of Eni SpA. “They are so desperate that they will do whatever they can to do it -- even sacrifices.”
The Ministerial Monitoring Committee, chaired by Kuwait, will also include Algeria, Venezuela and non-OPEC members Oman and Russia. One issue it could address is the difference between OPEC’s estimates of members’ output and those from the countries themselves.
Throughout the negotiations over last year’s deal, Iraq insisted OPEC’s data shouldn’t be used because it underestimated the country’s production by about 5 percent. In OPEC’s monthly report released Wednesday, there remains a 200,000 barrel-a-day discrepancy between Iraq’s own estimates and the data OPEC compiles from external sources.
In any case, oil traders may reserve judgment until there’s data from oil-importing nations showing that their inventories have declined, proving that the cuts are having a tangible effect, said Mike Rothman, president of Cornerstone Analytics.
“The compliance committee is about optics more than anything else,” Rothman said.
Kuwait has recommended that countries match production cuts with a corresponding drop in exports. This would prevent members from topping up exports with oil from storage. OPEC Secretary-General Mohammad Barkindo has said countries are being asked to submit export data, yet Russia opposes the idea.
The figures may not be useful, as exports will for some time still reflect production levels from before the agreement, said Ed Morse, head of commodities research at Citigroup Inc.
Based on the initial data, the committee will be able to report compliance of as much as 60 percent, said Morse. The best rate attained during its 2008 agreement was 70 percent, according to Hasan Qabazard, OPEC’s former head of research.
“They’re looking for 80 percent compliance,” said Morse. “Fifty to 60 percent compliance in the first few weeks is pretty good. If you just add up the Gulf countries and Russia today, that’s a very constructive contribution.”