The curious case of Opec+ compliance

Author Nader Itayim, Editorial Manager

Less than two months into the newest round of Opec+ production cuts, compliance issues are already taking center stage with many of the usual suspects still ‘at large.’

Opec’s de-facto leader Saudi Arabia has made clear that it will no longer accept anything less than full compliance by all members, no matter their size, insisting that the days of free-riding are over.

As any Opec-watcher knows, the organization’s history is littered with failed attempts to mandate full compliance. What is to say this time will be any different?

Ever since Opec and its non-Opec partners embarked on their journey to restore market stability back in January 2017, the success of their alliance has largely been built on a steadfast commitment by Opec kingpin Saudi Arabia and its Mideast Gulf allies the UAE and Kuwait to do “whatever it takes.” This maxim, which was frequently used by former Saudi energy minister Khalid al-Falih, regularly saw the three Mideast Gulf producers produce well below their respective output caps to compensate for the under-performers.

The policy worked in that it ensured good overall Opec and non-Opec compliance figures that regularly topped the 100pc mark. In some months, compliance rose to as high as 150pc. But it also promoted a degree of complacency among the laggards. So much so that the ‘problem’ countries of the early years have since become repeat offenders. Iraq, which is rebuilding an economy battered by decades of war, sanctions and unrest, and Nigeria, with its own security troubles, are now among those that have become most synonymous with non-compliance.

In his final year as energy minister, al-Falih frequently made it a point to call these countries out, insisting that Saudi Arabia was not prepared to continue overcompensating indefinitely. But the threats were ultimately empty, and the laggards knew it.

Fast forward to today, and Saudi Arabia still finds itself facing up to poor compliance from many of these same countries. What is different, however, is how the Saudis are now tackling the issue.

The Opec+ joint ministerial monitoring committee (JMMC) last month concluded that overall compliance with the cuts was 87pc in May – 92pc for non-Opec and 84pc for Opec. Of the 9.7mn b/d that the group had pledged to cut, only around 8.44mn b/d was delivered. The worst offenders? That’s right – Iraq and Nigeria, which were 52pc and 60pc compliant respectively, according to Argus estimates.

But, whereas under al-Falih Saudi Arabia would have likely overcompensated for these countries with deeper cuts, the current energy minister, Prince Abdulaziz bin Salman, appears to finally be delivering on his predecessor’s threats. As was evident in his handling of the March Opec+ debacle in Vienna, the prince very much subscribes to the “all-or-nothing” mantra. Either all countries do their bit, or nobody cuts.

At the most recent JMMC meeting, all under-performing countries were given less than one week to submit detailed proposals showing how they would bring their output in line with their quotas in June, and how they would compensate for their over-production in July through September.

Despite some initial resistance from a select few countries, all ultimately complied thanks so some coercive Saudi ‘diplomacy’ and have since delivered their proposals to the secretariat.

Whether these plans materialize, however, remains to be seen.

Compliance in June was always likely to improve, purely on account of the near 1.2mn b/d additional cuts that were offered by the Mideast Gulf Opec core: Saudi Arabia said it would cut an extra 1mn b/d on top of its 2.5mn b/d pledge; the UAE an extra 100,000 b/d and Kuwait an extra 80,000 b/d. Non-Opec Oman, which has long been one of the biggest proponents of the Opec+ framework, also chipped in with a pledge to cut an extra 15,000 b/d.

Signs are so far that the four have largely delivered on these incremental cuts, which, all else equal from May, would close much of the gap to 100pc compliance.

July, however, is when the fruits of this pressure will primarily be seen as the under-performers begin to kick their so-called ‘compensation plans’ into gear. Prince Abdulaziz said this should actually help overall cuts exceed the 9.6mn b/d for July, and the 7.7mn b/d planned for August and September.

And yet, despite the extra Saudi pressure, and the additional cuts that should be coming, expectations of an improvement in compliance still remain low. 51pc of respondents to an Argus Twitter poll this week said they actually expect overall compliance by the Opec+ group to deteriorate and fall below 87pc in July, while 38pc said they expect compliance of between 87pc and 100pc. Only 11pc shared the prince’s optimism for more than 100pc compliance.

A wise person once said if you want a different result, you have to try a different approach. The Saudis have done that. Only time will tell if it works.

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