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Saudi Arabia keeps pressure on OPEC+ compliance, warns market not to test bloc

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Saudi Arabia keeps pressure on OPEC+ compliance, warns market not to test bloc

Highlights

Compensation cuts for overproduction due by end-December

JMMC stands pat on output cuts but notes headwinds

OPEC+ will be 'proactive and preemptive' on output policy

London — Saudi energy minister Prince Abdulaziz bin Salman on Sept. 17 said he's secured commitments from OPEC+ compliance laggards to make good on their pledged crude production cuts by the end of December, then delivered a warning to market speculators betting against the alliance: "Make my day."

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Even as he declined to signal whether OPEC and its allies would taper their cuts, as scheduled, in 2021, saying he wanted to the market guessing and traders "jumpy," the prince said the producer coalition would keep its hand firmly on its taps and be "proactive and preemptive" on output policy as the global situation warrants.

"We will never leave this market unattended," Prince Abdulaziz told reporters after a meeting of the OPEC+ Joint Ministerial Monitoring Committee he co-chaired with Russian counterpart Alexander Novak. "Whoever gambles on this market will be 'ouching' like hell."

The OPEC+ coalition in August rolled back its historic 9.7 million b/d production cut accord to 7.7 million b/d and is scheduled to relax it further to 5.8 million b/d at the start of 2021.

The cuts, implemented in May, are largely credited with reviving the market from the coronavirus shock of the spring, when Brent prices collapsed into the teens. But the rally has stalled since June between $40-45/b, and growing infection cases have several forecasters projecting far less global oil demand growth than previously expected.

Still, rather than tightening quotas, the JMMC decided to stand pat on current production cuts and instead reapply pressure on compliance delinquents to fulfill their commitments.

Novak told Russian broadcaster Rossiya24 after the meeting OPEC+ believes oil demand will fully recovery to pre-pandemic levels by the second quarter of 2021.

"Our aim is to keep track of the market and as demand recovers to slowly increase supply as to not overheat the market," he said.

Quota busters put on notice

Ensuring full compliance will help.

Under the deal, any countries that overproduced their quotas must make extra "compensation cuts" of an equivalent volume in subsequent months.

In all, countries that exceeded their quotas from May-August have a cumulative 2.375 million b/d of compensation cuts due, according to the committee's analysis.

The December deadline is actually an extension of the previous September deadline, in what appears to be a concession that cracking the whip too hard on compliance could backfire in keeping the group unified.

"We were given full assurance of their willingness to compensate if provided with additional time," said Prince Abdulaziz, who has made eliminating OPEC+ free-riders a top priority.

He made his remarks with UAE energy minister Suhail al-Mazrouei seated next to him in Riyadh, while other ministers attended the JMMC meeting via videoconference.

The UAE had emerged as a flashpoint, with its traditionally strong compliance blemished by what Mazrouei confessed was a 100,000 b/d breaching of its quota in August due to its need for associated gas supplies. Some secondary sources used by OPEC+ to monitor output have the violation even higher.

Prince Abdulaziz praised UAE for its previous compliance and said he and Mazrouei had a productive discussion before the meeting. But he added in his opening remarks to the JMMC: "Not fully complying and then compensating should not become the norm. We must strive to put the compensation scheme behind us and implement all of these compensation schemes hopefully before the end of the year."

After the meeting, Mazrouei said the UAE remained fully committed to the OPEC+ deal and September would see his country hit 100% compliance, with compensation cuts to follow in October and November.

"The UAE has already implemented measures and we have informed the market," he said. "The UAE has always been a responsible and reliable partner to OPEC."

Staying flexible

Besides the UAE, Russia also has work to do to bring its production down in line with its quota, with some countries frustrated the JMMC co-leader is not doing its part, according to sources.

Novak said Russia "greatly values cooperation with OPEC," and while overall compliance with the cuts is high, added, "I would like to urge everyone to view this very seriously and stick to the high level of conformity we were able to achieve."

Iraq, which has consistently struggled to make its quota, was in full compliance in August but has said it will likely need more time to implement its compensation cuts it committed to fulfil by the end of September.

The nine-country JMMC is tasked with monitoring market conditions, tracking member compliance and recommending any changes to the OPEC+ deal, if needed. It is next due to meet online Oct.19, while the full 23-country OPEC+ coalition is scheduled to meet Nov. 30-Dec. 1 in Vienna.

Even with full conformity with the pledged cuts going forward, including compensation cuts, global oil inventories will remain elevated above the five-year average the OPEC+ alliance has said it is targeting well into 2021, according to technical analysis prepared by the OPEC secretariat for the JMMC.

"The JMMC observed that the recovery has not been even across the world and an increase in COVID-19 cases has appeared in some countries," the committee said in its post-meeting communique. "In the current environment, the JMMC emphasized the importance of being proactive and preemptive and recommended that participating countries should be willing to take further necessary measures when needed."

OPEC+ compensation cuts due (million b/d)
Country
May-August overproduction
OPEC
Algeria
None
Angola
0.113
Congo
0.137
Equatorial Guinea
0.035
Gabon
0.19
Iran
Exempt
Iraq
0.698
Kuwait
None
Libya
Exempt
Nigeria
0.283
Saudi Arabia
None
UAE
0.184
Venezuela
Exempt
Total OPEC
1.641
Non-OPEC
Azerbaijan
0.004
Bahrain
None
Brunei
0.041
Kazakhstan
0.164
Malaysia
None
Oman
None
Russia
0.333
Sudan
0.008
South Sudan
0.184
Total non-OPEC
0.734
Total OPEC+
2.375
Source: OPEC+ document