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In its effort to shore up global oil markets, OPEC+ is pushing members to atone for cheating on their supply quotas. Yet there’s little indication that they’re repenting.
Iraq and Kazakhstan — members of the OPEC+ coalition that is paring crude output to defend prices — have pledged extra curbs to make up for failing to cut enough initially. The latest production estimates show they haven’t even started yet.
Furthermore, internal OPEC+ documents compiled for the group’s monitoring committees, which were obtained by Bloomberg, show that members had a poor track record of compensating for overproduction in previous rounds of cuts in 2021.
These failings represents a headwind for crude prices, which have climbed to a two-month high near $87 a barrel in London. The excess production may offer some relief for consumers, but if it were to suppress prices it would threaten vital revenue for producers in the Organization of Petroleum Exporting Countries, which is led by Saudi Arabia.
Compensation cuts are a “significant component” of the coalition’s strategy, according to Standard Chartered Plc. “We need it, and we need it badly,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after the latest OPEC+ meeting on June 2.
Since its introduction in mid-2020, the OPEC+ mechanism of compensation for over production has rarely been honored. The OPEC data from 2021 show that Iraq’s backlog of overdue curbs barely changed that year, while the outstanding debt of Gabon ballooned so much it would have needed to shut down output completely for two months to offset it.
The deadline for these countries to complete their penance was repeatedly extended. By October 2021, more than a year after the compensation mechanism was launched, the backlog of additional curbs owed by Iraq and Kazakhstan had swelled rather than diminished, even though rising OPEC+ quotas should have made it easier for them to whittle down the overhang.
There were a few examples of countries compensating for overproduction. Most notable is the United Arab Emirates, which swiftly offset excess volumes in the fall of 2020 following a public scolding from Riyadh. Yet such instances weren’t the norm, and the group’s past performance feeds into skepticism about compensation cuts today.
“Hard evidence would be needed for the market to be convinced that amends have actually been made,” said Tamas Varga, an analyst at brokers PVM Oil Associates Ltd. Traders take the view that “I believe it when I see it.”
The latest round is off to an inauspicious start.
From May, Iraq and Kazakhstan promised both to adhere to their assigned limits, and cut substantially below these levels each month to make up for overproduction since the beginning of the year. But neither country has so far hit their initial quota, let alone begun the work of compensation.
Baghdad pumped about 195,000 barrels above its target in May, at 4.195 million a day, while Astana produced an excess of 43,000 a day, at 1.511 million a day, according to OPEC’s latest monthly report. Data compiled by Bloomberg indicate that Iraq continued to overproduce at a similar level in June.
Both countries have a long history of chafing against OPEC+ quotas, as Iraq seeks revenue to rebuild its war-shattered economy, while Kazakhstan rushes to monetize new capacity, such as the $48.5 billion Tengiz oil field project led by Chevron Corp.
Neither country responded to requests for comment from Bloomberg. On June 12, Iraq’s Oil Ministry issued a statement reaffirming its commitment to the compensation cuts, and Kazakhstan’s Energy Ministry pledged to make up for its overproduction in the coming month.
Russia, which leads OPEC+ alongside Saudi Arabia, has pledged compensation but not yet published the schedule of extra cuts it was due to submit to the organization at the end of last month. Moscow curbed output substantially in May to 9.182 million a day, but still exceeded its regular quota by 133,000 barrels a day, according to OPEC’s data, which is compiled from a range of external sources. Moscow’s own figures showed a different, higher level.
Russia’s Energy Ministry declined to comment on whether Moscow had submitted the compensation plan to the OPEC secretariat.
Better Discipline
Even if the compensation curbs aren’t enacted, the overall principle could still have uses for OPEC+.
After the introduction of the compensation system in mid-2020, countries such as Iraq and Nigeria did demonstrate better discipline in adhering to their original quotas, even if they didn’t perform the additional cuts.
If the compensation schedules are transparent, it makes “overproduction, while not impossible, increasingly awkward diplomatically,” said Paul Horsnell, head of commodities research at Standard Chartered.
At its meeting in early June, OPEC+ outlined plans for managing supplies until the end of 2025, and agreed to extend the period for delivering compensation to the third quarter of that year. The group hasn’t published details, but the longer timeframe could spread the extra reductions into smaller installments that are easier for members to manage — though less noticeable to the wider oil market.
And if delinquent countries aren’t willing to cut deeper now, they might at least temper their increases if OPEC+ goes ahead with its plans to begin reviving some supplies in the fourth quarter.
