Opec+ members delay output increases to December

Opec+ members have opted to delay their plan to start increasing output by two months, against the backdrop of a sharp fall in prices and growing concerns about the oil demand outlook.

Eight members of the group — Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman — are now scheduled to start unwinding 2.2mn b/d of "voluntary" crude production cuts from December, instead of October, over a 12-month period, the Opec secretariat said on 5 September.

The plan had carried a proviso that the unwinding was subject to "market conditions". And the return of this supply is still not a foregone conclusion. The eight members retain the "flexibility to pause or reverse the adjustments as necessary", the secretariat says. If they go ahead with the updated plan, their collective output targets will rise by around 180,000 b/d in December.

The delay to the output increase came as Atlantic basin benchmark North Sea Dated fell close to $75/bl on 5 September, its lowest since December, on concerns over oil demand in China and the US. Beijing imported 1.3mn b/d less crude in July than June, taking its monthly tally of receipts down to 10mn b/d, the lowest in nearly two years. The oil price drop has not taken place in isolation, JP Morgan says. "Alongside commodities, US 10-year treasury yields have tumbled (-70bp) and the US dollar index came down by almost 2pc, signalling a shift in the assessment of macroeconomic risk in the US and globally."

The Opec+ delay means that any unwinding of its cuts will not come until after the 5 November US elections. But with gasoline prices there not seen at concerning levels and edging down, oil prices are not viewed as much of an election issue.

The decision could help establish a floor under prices, which have fallen despite an oil blockade in Libya that has driven the country's production down to around 300,000 b/d, from almost 1mn b/d. Opec+ may also have sought to add further support to prices by emphasising assurance by overproducers Iraq, Kazakhstan and Russia on "planned compensation schedules". Promised belt tightening from the three would effectively wipe out most barrels coming back to the market until October 2025 — as long as they deliver.

For now, the eight members have chosen to buy time and gain more clarity on how the markets develop in the fourth quarter, while also seeking to tighten the noose on compliance. Come early November, those members will have to determine if the market can handle the incremental increase — if not, Opec+ might be up for some hard decisions in December.

Compliance and compensation

Compliance by some serial overproducers improved in August, Argus estimates. Russia, which has tended to exceed its targets in recent months, saw its output fall by 70,000 b/d to 8.98mn b/d, bang on its formal output target. And Kazakhstan finally started to deliver on its pledge to start compensating for exceeding its targets, with its output in August coming in 40,000 b/d below its effective target under its compensation plan. The biggest overproducer was usual suspect Iraq, which was 200,000 b/d above its formal target and 290,000 b/d over its effective target under its latest plan to compensate for overproducing.

Overall production by Opec+ members subject to cuts was barely changed, easing by 10,000 b/d in August, as falls from Russia and Kazakhstan were offset by increases from Nigeria and the UAE. This drove the alliance's output down to 33.82mn b/d, around 30,000 b/d below its collective target. But the forced outages in Libya drove the group's overall output down by a hefty 300,000 b/d. Libya, like Iran and Venezuela, is exempt from production targets.