The Organization of the Petroleum Exporting Countries and their allies are expected to announce an agreement to reduce crude oil output further this week, even as the group, collectively known as OPEC+, struggles to see full compliance from all of its members.
A committee of oil producers led by Saudi Arabia and Russia recommended on Thursday that the group deepen their current oil production cuts by 500,000 barrels a day, The Wall Street Journal reported, citing officials from the Organization of the Petroleum Exporting Countries. The committee is also pushing for improved compliance from countries such as Nigeria and Iraq, which have not fully met their quota commitments, the report said.
The reduction would come on top of the current agreement between OPEC and its allies, collectively known as OPEC+, which calls for cuts of 1.2 million barrels a day from late 2018 levels through March 2020.
The deal has yet to be ratified by OPEC+, and the group plans to meet in early March to review the deal and potentially extend it, according to a tweet from Herman Wang, managing editor at S&P Global Platts. OPEC members are holding a closed session meeting Thursday and members will officially meet with allied nonmember producers on Friday.
“After Iraq raised the potential for a deeper cut [Wednesday], the bar has been raised for expectations,” said Matt Smith, director of commodity research at ClipperData. “Anything less than a cut, albeit for a limited period, could prompt a bearish response by the market—the absolute opposite of what OPEC wants.”
OPEC members in November pumped 29.65 million barrels a day of crude oil, with the 11 members subject to quotas achieving a compliance rate of 145% of the current production-cut agreement, according to an S&P Global Platts survey of the group’s production released Thursday. That means the members under the quotas are cutting 368,000 barrels a day more than 812,000 barrels a day that OPEC agreed to under the pact, the survey said.
Saudi Arabia self-reported its production at 10.3 million barrels a day in October, which is 431,000 barrels a day below its quota under the deal, in a move to “lead the coalition by example,” the survey said, while Iraq and Nigeria continue to produce oil above their quota limits.
Speculation over deeper cuts had been growing over the last few days, but there was also talk that the Saudis threatened to boost their own production because other members have failed to fully comply with current output reductions.
Prices on Thursday saw little reaction to the expectation of deeper cuts.
Increasing the production cuts to 1.7 million barrels a day has failed to impress the market because that “essentially brings production cuts in line with what OPEC+ has cut over the past year,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Management. “This cut is being seen as optics as opposed to real barrels off the market.”
Also, the market is concerned about “the idea that Russia will no long include condensates in their output numbers, which essentially means they do not have to cut any production to comply with quotas,” she told MarketWatch.
Even so, “deeper production cuts were not the consensus expectation coming into this week’s OPEC+ meeting (only an extension of current policy) and if they are formally agreed upon tomorrow, that will be an incremental positive for the market in the near to medium term,” said Tyler Richey, co-editor at Sevens Report Research. Then “we could see WTI futures breakout through resistance in the low $60s.”
On Thursday, West Texas Intermediate crude for January delivery
settled unchanged for the session at $58.43 a barrel. February Brent crude
added 39 cents, or 0.6%, to $63.39 a barrel.
The risk of a glut in supplies due to a slowing world economy and “threat of crumbling trade negotiations weighing on future demand remain a major headwind and that is more than likely going to keep any rallies in oil largely capped near the summer highs,” said Richey.