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There were no surprises during Thursday’s meeting of the Joint Ministerial Monitoring Committee of OPEC+, an alliance of the 13 OPEC member countries and 10 other oil-exporting nations.
During the meeting, which was chaired by Saudi Energy Minister Prince Abdul Aziz bin Salman and his Russian counterpart, Alexander Novak, members who have failed to comply with cuts to production quotas were once again admonished and asked to compensate for their overproduction.
There was no recommendation to change the trajectory of the cuts, which were agreed by all members in April to help stabilize the market amid falling demand as a result of the coronavirus pandemic.
Compliance for August was good: 102 percent according to OPEC, and 97 percent according to S&P Global Platts. However, some countries continue to produce above quota or are insufficiently compensating for past overproduction. The total backlog of barrels overproduced since May stands at 2.4 million barrels per day (bpd).
The identity of most of the laggards was no surprise. According to S&P Global Platts, Iraq over-complied marginally, but still remains 350,000 bpd above previously agreed compensation levels. Nigeria’s production was 70,000 bpd above the quota.
However, the markets had been surprised when the UAE exceeded its quota by more than 20 percent. Authorities there cited seasonal extra demand for air conditioning and desalination as a reason. In a significant show of solidarity with OPEC + and its program, Emirati Energy Minister Soheil Al-Mazrouei traveled to Riyadh to attend the meeting and subsequent press conference in person, standing side-by-side with his Saudi counterpart.
While the compensation mechanism and the time for over-producers to compensate was extended from the end of the third quarter through the end of the year, Prince Abdul Aziz could not have been clearer, during his introductory remarks, in his scolding of countries that had failed to comply.
“Compliance is not an act of charity. It is an integral part of our collective effort to maximize the interest and gains of every member in this group,” he said, adding: “In the face of uncertainty, the market will increasingly look at us for direction. We must demonstrate that we are disciplined and fully committed to our agreement.”
It is impossible to get around the fact that supply is only one side of the equation, and that in the end what matters most to market equilibrium is the balance between supply and demand.
Cornelia Meyer
These are wise words, indeed. The markets reacted well, with the price of Brent increasing by 2.7 percent on the day, and WTI by 2.2 percent. Fears over temporary production shutdowns in the Gulf of Mexico during the hurricane season also helped.
When all is said and done, OPEC+ members face the reality that demand is improving much more slowly than anticipated even a month ago. The International Energy Agency has downgraded its demand outlook twice in a row — by 140,000 bpd in its monthly oil report for August, and in September it further downgraded its demand forecast for the full year by 300,000 bpd.
Prince Abdul Aziz is correct to remind everyone that the credibility of the organization and its member countries absolutely depends on them complying with agreements. They have to walk the walk, not just talk the talk.
However, the question remains as to how much supply cuts can actually achieve in the face of lackluster demand developments. For sure, without the agreed cuts of 7.7 million bpd — preceded by reductions of 9.7 million bpd in May, June and July — prices would not have recovered from their April doldrums, when we saw decline in demand of about 30 million bpd amid the lockdowns that prevailed in most of the world.
When OPEC+ decided to taper the cuts from August on, the demand picture looked more optimistic. The virus had other ideas, however, and a resurgence of cases in Europe, as well as its continued unabated spread in India and America, gives cause for concern.
It is not all doom and gloom, though: the Organization for Economic Co-operation and Development has improved its global economic outlook. It now predicts the global economy will contract by 4.5 percent, compared with the 6 percent it forecast in June. This is more in line with the minus 4.9 percent prediction in June by the International Monetary Fund.
The big question during the full ministerial OPEC+ meeting, due to be held on Nov. 30 and Dec. 1, will be whether to extend the duration of the current level of production cuts, or stick to the schedule agreed in April, which would mean tapering current cuts by 1.9 million bpd from January.
A lot will depend on what is happening with demand at that time. Whatever is decided, we should not underestimate the difficulty of changing course, especially for poorer countries whose budgets depend on oil revenue amid a drastic, COVID-19-induced economic downturn.
It is impossible to get around the fact that supply is only one side of the equation, and that in the end what matters most to market equilibrium is the balance between supply and demand.
Prince Abdul Aziz did not allow himself to be drawn into the debate about what might happen during the next ministerial meeting. He did however say that he believes in flexibility and the willingness to move proactively and preemptively. “We will never leave this market unattended,” he said.
And unlike at the beginning of the year, when Russia shunned Saudi attempts to cut production as the virus started to take a grip of the world, the prince’s Russian counterpart, Novak, is now singing from the same hymn sheet.
•&Բ;Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources