Energy Mix Report

Saudi energy minister Prince Abdulaziz bin Salman delivered yet another warning to OPEC+ compliance laggards, saying at a Sept. 17 monitoring committee meeting that failing to execute pledged production cuts was undermining the alliance’s efforts to rebalance the oil market.

“Repeated promises that are not carried through in a timely fashion may have temporary positive impact, but if these are not delivered, they can come back to bite us all,” he said in his opening remarks to the Joint Ministerial Monitoring Committee.

“The market can’t be fooled continually. These false promises not only discredit those who make them, but also weaken our collective goal.”

OPEC and its allies in August rolled back their historic 9.7 million b/d production cut accord to 7.7 million b/d, anticipating a pick-up in global oil demand.

Collective compliance was 101% in August, but not all members shared the burden equally, and any countries that overproduced their quotas must make extra “compensation cuts” of an equivalent volume in subsequent months.

In all, countries that exceeded their quotas from May-August have a cumulative 2.375 million b/d of compensation cuts due, according to a technical committee report seen by S&P Global Platts.

The JMMC had previously said the compensation cuts should be completed by the end of September, but in an acknowledgment that this deadline was unlikely to be met, Prince Abdulaziz said: “We must strive to put the compensation scheme behind us and implement all of these compensation schemes hopefully before the end of the year.”


Prince Abdulaziz bin Salman

The UAE has emerged as a potential flashpoint, with its traditionally strong compliance blemished by what its energy minister, Suhail al-Mazrouei, has already confessed was a 100,000 b/d breaching of its quota in the month. Some secondary sources used by OPEC+ to monitor output have the violation even higher.

Mazrouei was seated next to Prince Abdulaziz in Riyadh for the JMMC meeting, which other ministers attended via videoconference.

The prince praised UAE for its previous compliance and said he and Mazrouei had a productive lunch discussion before the meeting. But he added: “Not fully complying and then compensating should not become the norm.”

Mazrouei did not make remarks during the portion of the meeting that was livestreamed to the public. Abu Dhabi National Oil Co., which produces the vast majority of the UAE’s crude, has pledged significant October and November allocation cuts to term customers.

Enforcing discipline
Besides the UAE, Russia also has work to do to bring its production down in line with its quota, with some countries frustrated that the JMMC co-leader is not doing its part, according to sources.

Energy minister Alexander Novak said Russia “greatly values cooperation with OPEC,” and that while overall compliance with the cuts is high, “I would like to urge everyone to view this very seriously and stick to the high level of conformity we were able to achieve.”

Meanwhile, Iraq, which has consistently struggled to make its quota, was in full compliance in August but has said it will likely need more time to implement the compensation cuts it had committed to fulfilling by the end of September.

Prince Abdulaziz, who has declared Saudi Arabia’s tolerance for OPEC+ free-riders to be over, has cracked the whip on compliance over the last few months, pressuring recalcitrant members, both privately and publicly, to improve their performance.

But oil prices have been mired between $40-$45/b since June, far below what many countries have budgeted for, and the global economy is still encountering headwinds in controlling the coronavirus impact. The 7.7 million b/d in collective cuts are scheduled to remain in place through the end of 2020, after which they will ease to 5.8 million b/d for 2021 and the first quarter of 2022.

Prince Abdulaziz will have to tread a fine line in enforcing compliance, while not upsetting members too much, particularly with close ally UAE undermining his pressure campaign, one delegate said on condition of anonymity.

“The Saudis are going to push them to comply, [but] there are a lot of angry countries,” the delegate said.

Gloomy forecasts
The JMMC, co-chaired by Prince Abdulaziz and Novak, is tasked with monitoring market conditions, tracking member compliance and recommending any changes to the OPEC+ deal, if needed.

Its meeting comes as the International Energy Agency, the US Energy Information Administration and OPEC itself have downgraded their global oil demand forecasts, seeing a much weaker recovery from the pandemic.

In its latest monthly oil market report on Sept. 14, OPEC projected that 2020 oil demand would come in 400,000 b/d lower than it had predicted in August, while 2021 was revised down by about 770,000 b/d.

Even with full conformity with the pledged cuts going forward, including compensation cuts, global oil inventories will remain elevated above the five-year average that the OPEC+ alliance has said it is targeting well into 2021, according to technical analysis prepared by the OPEC secretariat for the JMMC.

“In the face of uncertainty, the market will be increasingly looking to us for direction,” Prince Abdulaziz said. “We must demonstrate that we are disciplined and committed fully to our agreement, and as a group, we are proactive, preemptive and ready to act when it is needed.”

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