OPEC’s November meeting is just a bit more than a week away. The most important issue OPEC members will debate at the meeting is whether to extend their production cut agreement beyond its current expiration date of March 2018.
At this point, most OPEC members have voiced support for extending the cuts. Supporters include Gulf States Saudi Arabia, the UAE, Kuwait and Qatar. Iraq, the second largest oil producer in OPEC, has also agreed to extend the cut and Iran has also assented. Even Ecuador has decided to support a continuation of cuts even though it said in October it would seek an exemption or possibly leave the cartel altogether.
With this OPEC consensus nearly certain, the real issue that could impact oil prices is compliance. Historically, OPEC members have agreed to production quotas but often chose to disregard them and overproduce.
In fact, the UAE, one of the deal’s biggest proponents, has overproduced its quota this year by an average of 5,000 bpd (according to data from S&P Global Platts). Other OPEC producers have overproduced their quotes by even greater margins.
Iraq is the biggest offender, overproducing by about 83,000 bpd. Gabon, Ecuador and Algeria have also overproduced by a combined 14,000 bpd. Even if these countries agree to extend the production cuts, there is no guarantee that they will adhere to them.
Smaller producers like Ecuador, for example, are likely to assent to the deal at the OPEC meeting, but then overproduce just enough to bring in more revenue. The likelihood of overproduction will increase if oil prices retreat from recent highs in the $60s for Brent and the mid-$50s for WTI.
OPEC’s overall compliance seems better than it is because some producers (especially Saudi Arabia and Venezuela) have cut more than their quotas required. Saudi Arabia made the conscious decision to cut its own production more than necessary, perhaps in order to compensate for overproduction elsewhere. Venezuela, on the other hand, simply cannot afford to produce up to its quota. In addition, Iran has had difficulty keeping up with the initially robust production rates it accomplished immediately following the end of sanctions. Despite its special exemption, Iran has averaged 9,000 bpd under its quota.
Iraq has been lucky that other producers have cut more than required so its overproduction did not significantly impact the overall deal. Perhaps in a show of good faith before the November OPEC meeting, Iraq cut its production in the month of October from 4.5 million bpd to 4.38 million bpd. However, even with this cut, Iraq is still producing 70,000 bpd above its quota.
OPEC will likely tout the wonderful effects of its production cut plan at its 30 November meeting. After all, Brent has risen to over $60 a barrel. But market watchers are waiting to hear from OPEC itself to determine the strength of members’ commitment.
Author's Note: I will be at the OPEC meeting and live tweeting, with events starting on 29 November and the meeting occurring on 30 November. Don’t forget to follow me on Twitter @EnergzdEconomy for updates.