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OPEC Playing Cat-And-Mouse Game With Oil Markets

By Ellen R. Wald, Ph.D.CommoditiesMar 29, 2017 05:05AM ET
www.investing.com/analysis/opec-plays-cat-and-mouse-with-the-oil-market-200180489
OPEC Playing Cat-And-Mouse Game With Oil Markets
By Ellen R. Wald, Ph.D.   |  Mar 29, 2017 05:05AM ET
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Last weekend, the OPEC / non-OPEC Joint Ministerial Monitoring Committee (JMMC) surprised many oil market analysts and investors when it chose to not recommend an extension of the production cut deal. This led to a brief drop in oil prices when markets opened on Monday.

Instead of recommending that OPEC and non-OPEC countries continue the production cuts for an additional six months period, the committee decided to withhold any recommendation until at least its next meeting, in late April. When and where the ministers will meet has not yet been announced.

Shale oil producers, banks and investors are desperate for the stability that a clear indication to extend the deal would provide. However, committing to an extension at this point would damage OPEC’s position vis-à-vis non-complying producers. It would also prevent the organization from trying to negotiate further production cuts at its regular ministerial meeting on 25 May.

According to a Platts analysis, OPEC’s overall compliance rate is 106%, meaning collectively OPEC has cut more than it promised. However, the committee noted that this was due to Saudi Arabia’s more generous cut. Saudi energy minister Khalid al-Falih, who did not attend the meeting, has made clear that his country’s additional cuts were a one-time show of goodwill and that Saudi Arabia will not continue to cover for “free riders.”

Iraq and the UAE were specifically called out for their lagging performance. Ministers from both countries delivered assurances that additional cuts are pending.

  • The UAE committed to reducing its oil output by cutting an additional 139,000 bpd in March and April. ADNOC (the UAE national oil company) has scheduled oil field maintenance that will result in these production cuts.
  • Iraq, on the other hand, reiterated its commitment to fully implementing the agreement but did not offer any specific timeframe or plans to meet its 210,000 bpd cut. At this point, it seems unlikely that Iraq will fully comply with its quota. In fact, Iraqi oil minister Jabbar al-Luaibi, recently said that Iraq is focusing on export numbers, not production, and considers his country in compliance with respect to exports. The JMMC did not agree.
  • Russia, a member of the monitoring committee, is also not in full compliance. Energy minister Alexander Novak said that Russia, which as of March only cut 185,000 bpd of its 300,000 bpd commitment, would implement its cuts fully by April.

Several OPEC members have already voiced support for rolling over or expanding the production cut agreement. These include Venezuela, Iraq, Algeria, Angola and Qatar. Non-OPEC member Oman also supports extending the production cuts for an additional six months. Russia and Saudi Arabia—the most powerful producers in the OPEC—non-OPEC deal—both say it is too soon to make a recommendation on the matter. It is unlikely that either nation will support a rollover before the 25 May OPEC meeting.

Reserving support for an extension of the cuts gives Saudi Arabia leverage to pressure non-compliant OPEC countries into better compliance and to bring Iran, Nigeria and Libya into the deal. Those nations currently have exemptions.

From Russia’s perspective, there is no upside to committing to a rollover at this point. However, by withholding consent, Russia could potentially extract further production cuts from OPEC in May. Despite the proposed compliance meeting in April, decisions will not likely come before the end of May.

OPEC Playing Cat-And-Mouse Game With Oil Markets
 

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OPEC Playing Cat-And-Mouse Game With Oil Markets

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Tony Mahomi
Tony Mahomi Mar 29, 2017 3:15PM ET
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And the mouse is !
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Do Deikins
DoRight Mar 29, 2017 3:03PM ET
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Iraq says it is none of your business unless it is exported; the Saudis call it "storage". Pretty much the same thing. Russians are waving their arms and talking loud, hoping no one will really look at their cards. Will they even get one month on the money? Hold 'em close and don't draw to an inside straight.
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Raymond Chan
Raymond Chan Mar 29, 2017 8:27AM ET
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It is the US, real oil price manipulator!
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Pier-Olivier Marquis
Pier-Olivier Marquis Mar 29, 2017 8:27AM ET
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Wow man, there is a fully detailed article on the current production status and likely updates for the next few months and that's the smartest thing you have to add?
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Joice Juice
Juice Mar 29, 2017 8:27AM ET
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WEll....He is telling the truth...WTI just bounced back up only by looking at EIA inventory data. You call it fair as an economic data?. No matter how hard these OPEC folks try, if they do not work with the US which it holds the biggest financial market in the world, they will fail.
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