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Page added on January 19, 2017
OPEC’s Production Cut: Who Will Cheat First?
There was one significant part of last year’s OPEC deal that was absent, and it may prove to be its undoing. Just weeks into the deal and days from a first inspection, there are rumours not everyone is playing by the rules.
On the face of it, reports are positive. Output fell in December from a record high, the result of planned cuts and forced cuts- Nigeria was not able to export any Forcados crude after a pipeline was attacked.
However, several reports raise concerns about Iraq reneging on the deal, with the Wall Street Journal talking of ‘an unexpected twist’: “instead of cutting its crude production by 4 percent as promised … Iraq instead plans to increase crude oil exports in January.” Investors.com quotes Omar Al-Ubaydli from George Mason University who believes that it’ll be the first to cheat as “Baghdad needs oil revenue to continue fighting the Islamic State and lacks control of all of its oilfields.”
There’s also the issue as raised by CNBC.com about how Iraq can fulfil its contractual commitments to international oil companies occupying fields in the south. Reuters reported in November last year that the companies get compensation if production is curtailed. CNBC quotes Jessica Brewer, Wood Mackenzie’s principal analyst for Middle East and North Africa upstream oil and gas, as saying, “Of the Middle East producers that agreed to the cuts, it’s probably the one that has the most [international oil company]-operated production. There are a lot more parties involved, which makes it more complex.” Information obtained by Thomson Reuters suggests exports exceeded a record high in November.
Despite this, last week Iraq said it had already started to put in place the measures needed to reduce output. That’s at odds with the official government record the WSJ says it examined, which suggested exports would be increased by 7 percent, however Prime Minister Haider al-Abadi is already putting the blame squarely on the Kurds, claiming, “The region is exporting more than its share, more than the 17 percent stated in the budget.” Under the 2017 budget – passed in the face of a boycott by Kurdish representatives – the region is allowed to export 250,000 bpd from oilfields under its control. Iraq is exasperated by a lack of control over Kurdish exports due to the pipeline to Turkey completed in 2013.
Others appear to be playing ball – like Kuwait which cut production to 2.7m bpd by last Friday. Doing so meets its requirement under the deal. Saudi Arabia too met its target of 10.05m bpd – cutting at least 486,000 bpd. These positive moves have supported a positive market response – process increased nearly 9 percent in December and oil futures finished on Friday having climbed for a fourth straight week.
That leads us to the next fly in the ointment. Increases in oil prices could encourage producers who haven’t signed up to the agreement – namely those in the U.S., Libya and Nigeria. Marketwatch.com notes FGE consultancy is predicting a sense of fellowship is missing; “With output in Libya and Nigeria probably rising this month to some 700,000 barrels a day and 1.7 million barrels a day, respectively, we estimate that actual total OPEC output in January could be closer to 33.5 million barrels a day than to the official ceiling of 32.5 million barrels a day.”
Reuters reported on Friday that Iran has pressed the sale button on more than 13 million barrels of oil it had held on tankers at sea for the past three months. As many as 30 tankers had been afloat since the summer holding 29.6 million barrels, but now data from Thompson Reuters Oil Flows shows the volume of oil at sea has dropped to 16.4 million. Iran scored a major goal when it was not only excluded from the November agreement to cut production but allowed to increase it as well, and Reuters quotes unnamed industry sources who say that it, “is also looking to use the opportunity to push into new markets in Europe, including Baltic and other central and eastern European countries.”
The problem is that there is a distinct lack of consequence for any country that’s reneges on the deal. As Al-Ubaydli puts it, “There is no mechanism to punish violators. So even if they detected a violation, the only thing they can do is to retaliate by cheating.” The fear is, once the foundations start to crumble, others may quickly follow. And those who benefit from pain suffered by the group en masse may enjoy a short-lived honeymoon.
9 Comments on "OPEC’s Production Cut: Who Will Cheat First?"
Nony on Thu, 19th Jan 2017 7:26 pm
Iran/q.
Boat on Thu, 19th Jan 2017 8:53 pm
The Iea raised world oil demand from 1.2 Mbpd to 1.3 and now to 1.5. Since 2016 ended the year at 1.4 one wonders where the drop in expectation came from. Since most of the worlds economies are expected to improve it seems like their model needs some revamping.
GregT on Thu, 19th Jan 2017 9:43 pm
“Since most of the worlds economies are expected to improve it seems like their model needs some revamping.”
Global Economic Prospects Weak Investment in Uncertain Times
Stagnant global trade, subdued investment, and heightened policy uncertainty marked another difficult year for the world economy. A moderate recovery is expected for 2017, with receding obstacles to activity in commodity-exporting emerging markets and developing economies. Weak investment is weighing on medium-term prospects across many emerging markets and developing economies. Although fiscal stimulus in major economies, if implemented, may boost global growth above expectations, risks to growth forecasts remain tilted to the downside. Important downside risks stem from heightened policy uncertainty in major economies.
http://www.worldbank.org/en/publication/global-economic-prospects
GregT on Thu, 19th Jan 2017 9:44 pm
What is the global economic outlook for 2017?
“The global economy is in the midst of a decade long slow growth environment characterized by an imminent productivity growth crisis. The looming labor shortage in mature economies and skill deficiencies in emerging markets will add further challenges to global economic prospect. Global growth lacks demand drivers and potential output is likely shrinking while uncertainty is increasing. ”
https://www.conference-board.org/economic-outlook2017/
GregT on Thu, 19th Jan 2017 9:49 pm
Escaping the-low-growth-trap-effective-fiscal-initiatives-avoiding-trade-pitfalls-oecd-economic-outlook-presentation-november-2016
“Key messages 2 The global economy remains in a low-growth trap, but more active use of fiscal policy will raise growth modestly • Investment and trade are weak, weighing on drivers of consumption such as productivity and wages Policy uncertainties and financial risks are high • But low interest rates create window of opportunity Fiscal, structural, trade policies need to be interwoven for gains • Reducing trade costs raises growth but trade restrictions put jobs at risk • Expansionary fiscal initiative to boost growth and reduces inequality would not impair fiscal sustainability • Success of fiscal initiatives depends on structural policy ambition Collective action enables greater gains at lower political cost”
http://www.oecd.org/eco/economicoutlook.htm
GregT on Thu, 19th Jan 2017 9:56 pm
World Economic Situation and Prospects 2017
“In 2016, the world economy expanded by just 2.2 per cent, the slowest rate of growth since the Great Recession of 2009. Underpinning the sluggish global economy are the feeble pace of global investment, dwindling world trade growth, flagging productivity growth and high levels of debt. World gross product is forecast to expand by 2.7 per cent in 2017 and 2.9 per cent in 2018, with this modest recovery more an indication of economic stabilization than a signal of a robust and sustained revival of global demand. Given the close linkages between demand, investment, trade and productivity, the extended episode of weak global growth may prove self-perpetuating in the absence of concerted policy efforts to revive investment and foster a recovery in productivity.”
http://www.un.org/en/development/desa/policy/wesp/
GregT on Thu, 19th Jan 2017 10:06 pm
World Economic Forum 2017
The economic outlook for this year looks similar to 2016 – uneven and unspectacular, according to economists worldwide polled by Reuters in December. The result is despite investor optimism about a breakout for the world economy.
Many of the experts said the global trade slowdown, seen during the slight recovery from the financial crisis that started nearly a decade ago, could worsen.
https://www.rt.com/business/372489-global-economy-slowdown-2017/
Sissyfuss on Thu, 19th Jan 2017 11:57 pm
Someone tell Trump growth is dying. Of course he won’t believe it because it goes against his great again meme and also his attention span is too short to grasp it.
Lucifer on Fri, 20th Jan 2017 4:05 am
Sissyfuss, when Donald does finally kick the bucket, i will be there personally to escort him downstairs into the bowels of hell and i will make sure he knows growth is dying, but by then it might by to late, the world will be falling apart. Death and destruction will be everywhere.