London — Despite Iraq's history of habitual non-compliance, the OPEC+ coalition is confident the country will implement its agreed quota and also institute deeper cuts in July, August and September to make up for its overproduction, the Russian and Saudi energy ministers said June 8.
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Saudi energy minister Prince Abdulaziz bin Salman said the coalition would give Iraq the "benefit of the doubt" that it intended to comply. Iraq has said its May crude oil production was 4.21 million b/d, above its quota of 3.59 million b/d.
"Each of the countries signed to the OPEC+ agreement as a sovereign nation," the prince said on a news conference hosted by OPEC.
"The implementation will be self-imposed, and what we wanted to give people is a chance to recoup the declines, the lack of conformity, where they will carry it in the months of July, August and September."
Because each country's production is a sovereign right, the OPEC+ alliance has no enforcement mechanism beyond peer pressure.
OPEC and its allies, including Russia, agreed on June 6 to roll over their 9.6 million b/d in collective production cuts through July, to help bolster the market as it emerges from the depths of the COVID-19 pandemic.
Under the deal, Angola, Iraq, Kazakhstan and Nigeria committed to compensating for their lack of compliance in May with extra cuts below their quotas in July, August and September.
But both Prince Abdulaiz and Russian energy minister Alexander Novak said it was too early to say what the quotas would be for August and September. The deal, for now, calls on the 9.6 million b/d cuts to roll back to 7.7 million b/d starting in August.
Novak noted that the OPEC+ monitoring committee, which he and Prince Abdulaziz co-chair, would meet on a monthly basis to assess compliance and also gauge the market's recovery, so that the coalition can act flexibly.
"The key parameters for us is the pace of global economic recovery, the supply and demand balance and how close to equilibrium the market is," he said on the news conference.
"The other important factor is the inventories levels, which have been significantly in play over the past few months, and one of the key metrics for our decision-making process is the pace of inventories draws and coming back to five-year averages which will indicate the health of the market."
Extra Gulf cuts to unwind
Saudi Arabia and Gulf allies the UAE and Kuwait had said they would cut an extra 1.2 million b/d in June, but Prince Abdulaziz said those additional curbs would not continue in July.
Domestically for Saudi Arabia, its needs for crude to burn in power plants to meet air conditioning demand is set to rise with the onset of summer. The prince said Saudi Arabia's unwound extra cuts would largely be directed towards this power generation.
The prince said Saudi Aramco's sharp hike in official selling prices for July crude cargoes was a "good indicator that demand is coming back and thriving".
Saudi Aramco on June 7 raised its July crude export OSPs across the board, for all regions and grades. The OSP differential for its flagship Arab Light crude headed to Asia was set at plus 20 cents/b against the average of the Dubai and Oman benchmarks over July. That is up by $6.10/b from the June price, far above the $2-$5/b increase traders had expected, according to an S&P Global Platts survey.
"Take it as a good indicator that Aramco would not have done so unless it had had a clearer indicator there is a huge and sufficient demand," Prince Abdulaziz said of the price hikes.
As for Libya, its imminent restart of 300,000 b/d of production is not sufficient yet for OPEC+ to demand that its exemption from quotas be rescinded, ministers said.
Libya's production has fallen to almost zero amid a civil war, but with the the so-called Libyan National Army in retreat, state-owned National Oil Company said it restarted production in the country's largest oil field, Sharara, on June 7.
Libyan crude production was around 70,000-80,000 b/d until a few days ago, less than a tenth of what it was producing before Jan. 18 when the LNA orchestrated an oil port blockade
"We wish them well," Prince Abdulaziz said. "Certainly they are not a party to the reduction agreements. In due time, we will consider what to do with Libya, but as long as they are way behind what they are going to be producing, I think it will be unfair and unproductive."