After Sunday’s latest meeting between OPEC and non-OPEC countries in Vienna, energy ministers struck an optimistic note regarding the recent agreement to cut oil output as a committee set to monitor compliance with the deal meets for the first time. Oil producers said they are in “total agreement” on the mechanism for monitoring pledged output cuts, Kuwait Oil Minister Essam Al-Marzouk told reporters after the committee ended its meeting in Vienna.
“I am satisfied, I am optimistic and, as I said, the markets are on their way to rebalance and it’s happening,” Saudi energy minister Khalid al-Falih said. He added that compliance with the agreement, which calls for cuts to begin this month, had been “fantastic”, he said adding that “based on everything I know, I think it’s been one of the best agreements we’ve had for a long time.” The issue, however, is that what everyone else knows is largely sourced from word of mouth statements, at least until the first official reports of monthly production emerge, validating his optimism.
As a reminder, under the Vienna deal struck last December between OPEC and non-OPEC nations, producers agreed to lower production by nearly 1.8 million barrels per day (bpd) aiming to ease a global glut that has weighed on oil prices for more than two years.
Following Falih’s claim last week that 1.5 million bpd in production had already been taken out of the market, on Sunday the Saudi energy minister added that “usually non-OPEC would raise their production to compensate for voluntary cuts by OPEC. Now, we are seeing voluntary cuts by both sides.”Saudi Arabia, has already exceeded its target with an output reduction of more than 500,000 barrels a day, Al-Falih said, while Algeria and Kuwait have also cut to levels beyond their targets, according to ministers from those nations. Other OPEC members such as Iraq and Venezuela have not yet reached their quotas but say they are more than half-way there.
Al-Falih then predicted that “the other 300,000 bpd, for all I know, is still happening,” and hoped for 100 percent compliance in February. Full compliance could take global oil inventories back close to their five-year average by mid-2017, lowering oil in storage by around 300 million barrels, Falih said.
Still, despite the elated promises of cooperation, it still remains unclear just how monitoring of compliance would take place. According to Reuters, Kuwaiti oil minister Essam Al-Marzouq, who chairs the five-member compliance committee, said it would examine how to best monitor compliance and what level of compliance would be acceptable.The other members of the committee represent Algeria, Venezuela, Russia and Oman.
In other words, faith in “compliance” still remains largely a function of trust that OPEC is telling the truth, which in light of historic precedent, when numerous OPEC members complied with initial cut agreements only to defect shortly thereafter, can be a major leap of faith. Indeed, as Bloomberg notes, OPEC has often flouted its own target as member nations quietly tried to gain market share at their peers’ expense.
