Oil traders and investors cheered Wednesday’s landmark deal to curtail oil production. But history shows compliance with past accords to be patchy at best. Even if countries stick to their output caps, those that won exemptions could make the collective target all but unreachable if they boost production. The difficulty of monitoring non-OPEC cuts adds a further layer of uncertainty.
“You do have a problem with production compliance for sure,” said Olivier Jakob, managing director of Zug, Switzerland-based consultants Petromatrix GmbH. Rising output from Libya and Nigeria — both exempt from cuts — will push OPEC production beyond the quota next quarter, while “it will be very difficult to get 100 percent compliance from non-OPEC countries,” he said.
The Organization of Petroleum Exporting Countries agreed to curb production to 32.5 million barrels a day, the lower end of a range it agreed on two months ago, pushing oil above $50 a barrel on speculation the global glut will clear more quickly. But the last time OPEC had a collective quota, members exceeded it for 20 of the 24 months before the cap was scrapped at the end of 2015.
“Focus will now shift to implementation,” Goldman Sachs Group Inc. said Wednesday, suggesting that “evidence of compliance” could add $6 a barrel to its oil-price outlook. Jefferies Group LLC said “OPEC’s adherence to the agreement will be critical, and its track record is poor,” while compliance by non-OPEC producers is “even more tenuous.”
OPEC is banking on a reduction from producers outside the bloc of 600,000 barrels a day. Russia has agreed to trim output by as much as 300,000 a day, though Energy Minister Alexander Novak said the cut will be gradual. While Oman committed to a 10 percent reduction, Mexico rebuffed an assertion by Nigeria that it would also play its part. The remainder of the non-OPEC cut is as yet unaccounted for.
Among OPEC’s African members, Libya is ramping up production after exports were devastated by civil war. Output has doubled to almost 600,000 barrels a day since early September, and the country may sustain recent gains, Wood Mackenzie Ltd. said last month.
Also exempt from cuts is Nigeria, whose output has been crippled by militant attacks on its oil infrastructure. Production from the West African country could rise to 1.65 million barrels a day next year from 1.57 million a day in October, Deutsche Bank AG analysts said Wednesday in a report.
“One of the key things, and potentially the deal breaker, will be what happens if Nigeria or Libya recovers some of their production,” said Spencer Welch, a director at consultants IHS Energy. “Will OPEC stick to the 32.5 million maximum, and if so, who will provide the extra cuts?”
The bulk of the reduction approved on Wednesday will be shouldered by Saudi Arabia, which agreed to a 486,000-barrel-a-day cut. The kingdom typically lowers production by about half a million barrels in the winter anyway as demand drops with cooler temperatures, according to Welch, who said “it will not really become clear until May 2017 how much Saudi is really delivering.”
OPEC is scheduled to meet on May 25 to gauge the success of its deal, and has the option to extend the agreement beyond the initial six-month period. It’s setting up a monitoring committee to oversee the cuts, comprising representatives from Kuwait, Venezuela, Algeria and two non-OPEC nations.
Full compliance with quotas by OPEC and non-OPEC could send oil prices above $60 a barrel, Goldman Sachs said in a note. Morgan Stanley said crude may trade from $50 to $60 if the group sticks to its commitments, while Wood Mackenzie sees a price of $55 to $60 as long as OPEC is “very careful to meet the terms of the agreement.”