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Is The OPEC Oil Quota Deal Really Working? Depends On Your Metrics

By Ellen R. Wald, Ph.D.CommoditiesNov 22, 2017 05:00AM ET
www.investing.com/analysis/are-opec-production-cuts-actually-boosting-the-price-of-oil-200267441
Is The OPEC Oil Quota Deal Really Working? Depends On Your Metrics
By Ellen R. Wald, Ph.D.   |  Nov 22, 2017 05:00AM ET
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OPEC’s November meeting is just a bit more than a week away. The most important issue OPEC members will debate at the meeting is whether to extend their production cut agreement beyond its current expiration date of March 2018.

At this point, most OPEC members have voiced support for extending the cuts. Supporters include Gulf States Saudi Arabia, the UAE, Kuwait and Qatar. Iraq, the second largest oil producer in OPEC, has also agreed to extend the cut and Iran has also assented. Even Ecuador has decided to support a continuation of cuts even though it said in October it would seek an exemption or possibly leave the cartel altogether.

With this OPEC consensus nearly certain, the real issue that could impact oil prices is compliance. Historically, OPEC members have agreed to production quotas but often chose to disregard them and overproduce.

In fact, the UAE, one of the deal’s biggest proponents, has overproduced its quota this year by an average of 5,000 bpd (according to data from S&P Global Platts). Other OPEC producers have overproduced their quotes by even greater margins.

Iraq is the biggest offender, overproducing by about 83,000 bpd. Gabon, Ecuador and Algeria have also overproduced by a combined 14,000 bpd. Even if these countries agree to extend the production cuts, there is no guarantee that they will adhere to them.

Smaller producers like Ecuador, for example, are likely to assent to the deal at the OPEC meeting, but then overproduce just enough to bring in more revenue. The likelihood of overproduction will increase if oil prices retreat from recent highs in the $60s for Brent and the mid-$50s for WTI.

OPEC’s overall compliance seems better than it is because some producers (especially Saudi Arabia and Venezuela) have cut more than their quotas required. Saudi Arabia made the conscious decision to cut its own production more than necessary, perhaps in order to compensate for overproduction elsewhere. Venezuela, on the other hand, simply cannot afford to produce up to its quota. In addition, Iran has had difficulty keeping up with the initially robust production rates it accomplished immediately following the end of sanctions. Despite its special exemption, Iran has averaged 9,000 bpd under its quota.

Iraq has been lucky that other producers have cut more than required so its overproduction did not significantly impact the overall deal. Perhaps in a show of good faith before the November OPEC meeting, Iraq cut its production in the month of October from 4.5 million bpd to 4.38 million bpd. However, even with this cut, Iraq is still producing 70,000 bpd above its quota.

OPEC will likely tout the wonderful effects of its production cut plan at its 30 November meeting. After all, Brent has risen to over $60 a barrel. But market watchers are waiting to hear from OPEC itself to determine the strength of members’ commitment.

Author's Note: I will be at the OPEC meeting and live tweeting, with events starting on 29 November and the meeting occurring on 30 November. Don’t forget to follow me on Twitter @EnergzdEconomy for updates.

Is The OPEC Oil Quota Deal Really Working? Depends On Your Metrics
 
Is The OPEC Oil Quota Deal Really Working? Depends On Your Metrics

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Do Deikins
DoRight Nov 22, 2017 12:12PM ET
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"Perhaps in a show of good faith before the November OPEC meeting, Iraq cut its production in the month of October from 4.5 million bpd to 4.38 million bpd."  Politely put, but it might have something to do with production/transport problems in Kirkuk and (the rest of) Kurdistan.  The Saudi's changed their game midstream from production quota to export quota.  A large part of Iran's "initially robust production rates"  were from storage put in place during restrictions, so it is easy to see why their production currently is not bearing up.  As they truck oil from Iraq, their perceived production will rise, or will that oil be counted in Iraq's production quota? .But in all this fudging, reserves seem to be decreasing and prices are rising.  As a Nobel Prize winner once said, "You don't need a weather man to know which way the wind blows."
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Tom Kn
Tom Kn Nov 22, 2017 9:18AM ET
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Very insight...!! Thanks Ellen
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Oluokun Ibrahim
Oluokun Ibrahim Nov 22, 2017 7:45AM ET
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Thanks Ellen... The report is precise and concise. Grab a lot to jot down from it.
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Timochin Khan
Timochin Khan Nov 22, 2017 6:24AM ET
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Well done...Excellent report....Thank a lot Ellen...
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Solomon Lalani
Solomon Nov 22, 2017 4:31AM ET
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CL will be 60+ by the meeting.  Correction, if any, will come only after that.  But signs still favor bulls to take this to 70 or above
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Nov 22, 2017 4:31AM ET
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Dream on
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