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.
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.
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