OPEC+ keeps pressure on oil-cut cheats amid fragile recovery

OPEC+ kept up the pressure on Nigeria and Iraq to stop cheating on their crude-production targets, emphasizing the need for all members to stick closely to their agreement because the market recovery remains fragile.

Saudi Energy Minister Prince Abdulaziz bin Salman and his Russian counterpart Alexander Novak hailed the rebound in oil prices and demand, but repeatedly urged their allies in a video conference not to ease off their output curbs.

“Work still needs to be done and I urge you all not to relax the efforts of the past three months," Prince Abdulaziz said in his opening speech. “We should strive to achieve full adherence to our agreement."

The Organization of Petroleum Exporting Countries and its partners slashed output earlier this year when global lockdowns inflicted the biggest oil-demand collapse in history. Their sacrifices paid off, turning around a market that at its trough saw prices in New York crash below zero.

Brent crude futures are trading near $45 a barrel, triple the levels of late April. The effort has thrown a lifeline not only to the economies of OPEC+ members, but international companies like BP Plc and Exxon Mobil Corp.

Mixed Messages

Differing outlooks for the market emerged from Wednesday’s meeting of the Joint Ministerial Monitoring Committee, which oversees the OPEC+ deal.

At the start of the talks, Prince Abdulaziz said the signs were encouraging and oil demand could return to 97% of pre-pandemic levels by the fourth quarter. Yet the meeting’s final communique warned that the pace of the demand recovery was slower than expected with “growing risks of a prolonged wave of Covid-19."

FILE PHOTO: Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub in Cushing, Oklahoma, US.

Since striking the OPEC+ deal in April, which removed about 10% of supply from the global oil market, Saudi Arabia has kept up intense pressure on fellow members to fulfill their pledged output reductions.

In the hours before Wednesday’s meeting, Saudi King Salman bin Abdulaziz called Nigerian President Muhammadu Buhari to emphasize the importance of complying with production quotas and compensating for past shortcomings, according to state-run Saudi Press Agency.

Later in the day, King Salman’s son, Crown Prince Mohammed bin Salman, also had a phone conversation with Iraqi Prime Minister Mustafa al-Kadhimi, focusing on the same issues.

Russia reinforced the message from the Saudis, with Novak warning that the group cannot rest on its laurels and must fully implement its agreement.

Compensation Cuts

The coalition of producers has started restoring some of the vast quantities of crude halted during the depths of the Covid-19 crisis. From April to July it removed about 9.7 million barrels a day from the market, but started to ease that reduction to about 7.7 million this month.

So far, the supply boost hasn’t derailed oil’s fragile recovery, which has seen prices climb to a five-month high. Yet fuel demand and crude-cargo prices have faltered in critical Asian markets, underscoring the fragility of the rebound.

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Continuation of the price recovery will depend on maintaining discipline and ensuring that nations who didn’t live up to their promises in previous months make amends in August and September.

These compensation cuts were a big focus of the JMMC’s talks, particularly the amount due from Nigeria, said delegates. The additional curbs are “vital for the ongoing rebalancing efforts and to help deliver long-term oil market stability," according to the communique.

Despite the apparent importance of the issue, there was some confusion about the size of the compensation cuts. An earlier draft of the communique set the excess production from May to July at 2.3 million barrels a day, a number that was removed from the final version without being corrected.

According to Bloomberg calculations using OPEC+ data, the group would have to implement about 1.2 million barrels a day of additional cuts on average in August and September to fully compensate for the excess from May to July.

Nigeria, Iraq and the other laggards were given until Aug. 28 to come up with a detailed plan for their compensation cuts, according the final communique.

At the end of the meeting, Russia’s Novak was positive. “The situation instills optimism, we have basically reached the results we have aimed for in terms of market rebalancing," he said in an interview with state-run Rossiya 24 TV.