Opec, non-Opec statement leaves key issues unresolved
Opec agreed with its non-Opec allies led by Russia today to begin to boost their production back to 100pc compliance with the cuts levels agreed at the end of 2016.
Over-compliance in May was 147pc of the combined headline cut target of 1.8mn b/d – net 1.7mn b/d – according to the Joint Ministerial Monitoring Committee (JMMC). Saudi Arabia’s oil minister Khalid al-Falih who co-chaired the Opec, non-Opec meeting said that over-compliance reached an average of 938, 000 b/d over the past three months.
But the statement issued after today’s meeting skirted key issues. Like yesterday’s Opec statement, it left open to interpretation whether countries able to over-fulfil their quota may takeover unused quota of countries that cannot meet their allocation. Iran – facing US sanctions – and Venezuela – with tumbling production – are the most prominent countries concerned that others will benefit from their misfortune. Nor did the statement address the contingent issue of whether non-Opec countries’ might assume quota unused by Opec countries. In fact, non-Opec Russia, Kazakhstan and Oman have frequently produced more rather than less than their allocations, and overall non-Opec compliance has diluted that of Opec. Nonetheless, the dominant non-Opec party to the deal, Russia, was a firm advocate of higher group production and is determined to gain higher production for its oil firms.
The statement simply says: “The fourth Opec and non-Opec ministerial meeting hereby decided that countries will strive to adhere to the overall conformity level, voluntarily adjusted to 100pc, as of 1 July 2018 for the remaining duration of the Declaration of Cooperation,” which lasts till the end of the year.
It adds that “the JMMC [is] to monitor the overall conformity level and report back to the Opec and non-Opec Ministerial Meeting” on 4 December.”
Similar to yesterday, the moment the meeting was over, ministers gave their own accounts of what was agreed within the walls of the meeting room.
Al-Falih said: “Obviously, some countries … are not going to be able to produce, so the others will, and this implies that there will be indirectly a reallocation of cuts. And I think the JMMC’s focus, rather than on adherence to certain specific numbers per country, is going to be to stay within the 100pc, not to overshoot in a way that will hurt the market, by oversupplying crude oil, but at the same time, not to be overly strict in putting a pro-rata cap on each country that does not allow us to get close to the 1mn b/d.”
This flies directly in the face of comments by Iran’s Bijan Namdar Zanganeh to Argus, yesterday.
And al-Falih emphasised that: “We as Saudi Arabia can deliver as much as the market needs”, adding that the country had already anticipated higher demand in the second half of this year and that July output would be higher than June output by “hundreds of thousands” of barrels. The extra volumes would be delivered in August, he added. As Saudi Arabia raised its May production by some 160,000 b/d over April’s, this suggests that the country may exceed its 2016 allocation in coming weeks.
For his part, the Russian oil minister Alexander Novak made an early grab for extra barrels, saying: “We will be basing our decisions and actions on the actual need and demand by different players and countries in the market. But based on preliminary assessments we have done ourselves, the increase [for Russia] would be up to 200,000 b/d.”
And to justify this – given Russia’s own patchy compliance record – he asserted that non-Opec countries can encroach on unused Opec barrels, saying in a TV interview: “It is a group target, for all countries – Opec and non-Opec.”
Though the outcome is the same for now, this is a different interpretation to that of the Saudis. Rounding over-compliance up to 1mn b/d, Saudi Arabia has notionally allotted 750,000 b/d of restored production to Opec members and 250,000 b/d to non-Opec.
Comments from Iraq’s oil minister Jabbar al-Luaibi suggest he does not believe individual countries may assume the unused quota barrels of others. He said that “all countries that have compliances over 100pc, they go down to 100pc.” He said that Iraq’s role was key in “narrowing the gap be-tween the two sides.” Al-Luaibi also said the real increase for Opec, non-Opec would be in the range of 700,000-800,000 b/d between now and end of year.
But comments from non-Opec Oman backed the Saudi interpretation. Oil minister Mohammed bin Hamad al-Rumhi said that individual countries can produce over their quota “if needed.” Oman expects August to show some growth, but that it will take “at least six months to achieve the level that was agreed today and yesterday”. He added that this could be up to 700,000 b/d for Opec and non-Opec combined.
While al-Falih indicated that Saudi Arabia is already preparing to ramp up output significantly, he also said that the JMMC would be responsible for allocating, or at least underwriting, new production quotas based on ability to produce.
He said: “The delivery of this 1mn b/d will be left to the JMMC to coordinate amongst countries that have the capacity to produce.” He added that “with the exception of Venezuela” all of the other countries in the JMMC “hold most of the spare capacity today”, Al-Falih added.
Saudi Arabia, Russia, the UAE, Kuwait, Oman, Algeria and Venezuela are members of the JMMC although other countries may attend.
This new responsibility of the JMMC was not mentioned in statements issued after either the Opec meeting or the meeting with non-Opec countries. It signifies a major expansion of the powers the committee.
An Ecuadorean delegate appeared to echo al-Falih’s remarks on the JMMC. He said today’s meeting did not discuss quotas for individual countries “but the JMMC will have a conference on that.”
The Saudi minister said that in strongly supporting a release of extra supplies to the market, his country was responding to messages from consumers that higher oil prices and tighter markets were starting to hurt. Such messages were received from consumers such as China, Korea and India, and he included tweets by US president Donald Trump calling for lower oil prices on the grounds that they reflect the concerns of US consumers.
Novak, however, referred to other ways of ascertaining fundamentals “that do not include tweets”.