OPEC+ will have a major test of its internal cohesion in a few weeks when ministers will meet to discuss the next phase of the oil production deal.
The OPEC+ deal to cut production was originally introduced to rebalance global oil supplies. But things are moving too fast for the major oil-producing countries.
With the recent rise in Crude Oil prices and the rapid reduction in visible inventories, OPEC+ has had to raise its production target sooner than it had anticipated last December. And this is likely to reignite the fuse of conflict between the two giants of OPEC+, Saudi Arabia and Russia, leading to more brinkmanship from both countries and even undermining the recovery in oil prices.
Last week, the OPEC+ Joint Ministerial Monitoring Committee (JMMC) met to assess the progress of work to date, and the report of that work showed excellent production cuts.
An unprecedented 99% implementation rate of overall production cuts among member countries since the agreement came into effect last May.
Brent crude oil prices are running near $60 per barrel, a level not seen in more than a year.
Commercial oil stocks in developed countries in the OECD are falling, and OPEC now expects them to be below the nearly 5-year average (2015-2019) by August of this year, which is a key target for Saudi Arabia.
If things are going so well, why is it said that OPEC+ will have even bigger problems?
This is mainly because the Saudis are demanding that each member state comply with its respective commitments to cut production – after all, more than half of the members that signed the deal to cut production have not fully met their obligations. Moreover, as has been the case in the past, Saudi Arabia has taken on most of the quota for the OPEC+ production cut program, even making additional cuts.
Data show that Saudi Arabia has cut oil production by 37 million barrels as of December last year, which is far more than its initial commitment.
This widely varying rate of implementation of production cuts has led Saudi Arabia to frequently pressure its allies, such as asking Nigeria’s oil minister to urge African oil producers – particularly the Republic of Congo, Equatorial Guinea, Gabon and South Sudan – to fully comply with their supply quotas and to establish mechanisms to make up for their past default production quotas.
But given the production cuts involved and the potential impact on oil fields, Saudi Arabia’s demands may be difficult to achieve.
In the case of Equatorial Guinea, to meet the Saudi demands, the country would have to stop extracting crude oil for about 15 days to make up its share of overproduction.
And for South Sudan, one of the world’s poorest countries, a complete shutdown of production would be required for two and a half months.
Meanwhile, Russia, the largest non-OPEC producer with the largest share of overproduction, is not affected in the slightest by Saudi Arabia.
So it can be seen that although the OPEC+ work report looks like a good situation, it is actually those small oil producers that are under pressure, while the giant Russia is not asked to compensate for the production cut quotas and is even allowed to increase production, which shows that the organization is actually very fragile internally and conflicts may flare up at the drop of a hat.
Some market analysts point out that this situation, if it persists, could lead to four African members withdrawing from the production cut agreement – but of course, OPEC+ probably doesn’t care. Because the four African members produced a total of 740,000 bpd in December, just 8% of Russia’s 9.1 million bpd output.
What’s more, these African oil-producing countries are already producing close to their capacity caps, meaning they can add little additional supply in the future. But if Russia does not honor its production cut agreement, it can increase oil production by 1.2 million barrels per day on its own.
Counting the 1 million barrels per day of capacity that will be released when Saudi Arabia ends its additional production cuts, if the two giants, Saudi Arabia and Russia, increase production at the same Time, the oil market could add up to 2.2 million barrels per day of supply, which would certainly be a blow to the oil market that has just initially regained its supply/demand balance.
Early next month, OPEC+ oil ministers will meet to discuss their production plans for April. By then, the additional Saudi production cuts will also come to an end, and if oil prices can remain at current levels or even continue to rise, Russia is bound to raise production levels again.
OPEC+ reached an agreement in December last year to gradually ease production cuts, which planned to increase production by 500,000 barrels per day per month until it reached an increase of 2 million barrels per day and came into effect last month.
Although Russia and Kazakhstan have already received a share of the February and March production increases, which by definition should not be included in the April increase, analysts believe Russia clearly does not intend to abide by the agreement.
For now, Russian oil companies have been instructed to shift more crude to domestic refineries rather than the more lucrative exports in the face of rising oil prices. Russia is not an OPEC member, but it has gone to great lengths to establish a partnership with the latter, and it clearly does not want to cede OPEC+ efforts to push up oil prices to other countries, especially the U.S., where the oil industry is slowly recovering.
Analysts believe that Russia is likely to want to increase production at a faster rate to regain market share previously lost because of production cuts, which would cause dissatisfaction among Saudi Arabia and other OPEC+ members.
But at this stage, OPEC+ members will have no choice but to accede to Russia’s demands. After all, the previous breakdown in relations with Russia over a failed deal is still fresh in the minds of members – when oil prices plunged below $20 a barrel – and no member would want to see that happen again.
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