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Opec-Plus: What to Watch Going Forward

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Opec-plus producers led by Saudi Arabia and Russia reached agreement Saturday on a one-month extension of the deep oil production cuts in place for May and June, signaling that the alliance remains committed to assertive market management during the current disruption (related). Collective cuts of 9.6 million barrels per day -- excluding 100,000 b/d from Mexico -- will now last until end-July, before falling to 7.7 million b/d from August and 5.8 million b/d from January 2021 until April 2022. The two oil giants also secured buy-in from the 23-member group to adopt a mechanism under which noncompliant producers will make up for any deficits in their cuts by the end of September. In a move aimed at improving compliance, the alliance agreed to monthly meetings of the Joint Ministerial Monitoring Committee (JMMC). The alliance's next full ministerial meeting is scheduled for Nov. 30-Dec. 1. Energy Intelligence looks at the key questions for the alliance in the coming months. What are the main issues to watch for Opec-plus now? Saturday's comprehensive deal is without a doubt a win for Saudi Arabia and Russia. Both had worked behind the scenes to reach a pre-meeting agreement on all key agenda points, ensuring that the session was a smooth, fast and well-managed affair, delegates said. However, as in the past, the key issue will be keeping the alliance together, in particular as oil demand -- and oil prices -- rise on the back of an improved global economic outlook. Higher prices might prompt some producers to backpedal on their commitments in the coming months. In the immediate future, the focus will be on compliance levels. Given the tougher approach to accountability, led by Saudi Energy Minister Prince Abdulaziz bin Salman, the JMMC will now meet once a month to check each country's production figures. In the longer term, Russia's position will be important to watch. As the oil market improves, keeping Russia committed to market management could be a challenge. Moscow was badly hurt by the combination of the coronavirus and low oil prices, and is fully on board with the deal right now. Its compliance has been very good. But Moscow has been reluctant to commit to long-term production constraint in the past, viewing this more as a temporary response to a specific situation (IOD Apr.14'20). Russian Energy Minister Alexander Novak indicated then -- and again this weekend -- that the duration of the pact could be shortened if market conditions allow. Moscow has already started suggesting that demand should become the main parameter of market management -- and that if the global economy and demand start to recover, Opec-plus should divide, say, 50% of the increase in demand among its members, and increase production accordingly (IOD Jun.8'20). Moscow is unlikely to rock the boat in the near term -- the market's recovery is simply too fragile, and it has a strong interest in keeping the deal on track (NC Jun.4'20). But this could emerge as a key issue for Opec-plus dynamics in the future. That said, the trauma of the recent price war means any such differences are more likely to be resolved amicably. Why did Opec-plus agree on a one-month extension, not a longer one? An extension of the deep cuts in May-June for at least one month was seen as a good compromise: It worked for producers that were initially opposed to any extension and those that were targeting a longer one. "I was hoping for a three-month extension of the deal; that would have sent a stronger message to the market. But at least we have an agreement we can build on," said one non-Opec delegate. With the JMMC reviewing markets and making recommendations on a monthly basis until year's end, the alliance could potentially make short-term adjustments, if deemed necessary. Any action would still require consultation with and consensus among all 23 members. The next JMMC meeting will be held virtually on Jun. 18. What happens if countries still don't comply? There is no doubt that, in the near term, compliance will remain the most contentious issue. Saudi Arabia, which made an additional 1 million b/d of voluntary cuts in June, has made it clear that it is unwilling to tolerate poor commitment -- and the outcome of Saturday's meeting reflected this position. Put simply, Riyadh does not want to find itself in the same position it was in previously, where it shouldered the burden of the cuts while other alliance members fell short of their commitments. For the first time, countries now face direct pressure to comply or risk having all of the cuts rolled back, potentially reigniting a battle for market share and risking a renewed price slump. Producers that did not comply with their quotas in May and early June are obliged to present immediate plans on how they will now cut output to fall into line. While the results remain to be seen, this is viewed as a potentially powerful tool to increase adherence. Noncompliant producers are also supposed to make additional cuts in July-September to make up for volumes that they overproduced in May-June. There is no specific enforcement mechanism in the event that countries still don't comply. However, in addition to the risk of being named and shamed, the communique clearly states that the "continuity of the current agreement is contingent" on all producers fulfilling their commitments. Ultimately, the primary incentive is that improved compliance should lead to a sustained recovery in prices -- while, conversely, continued poor compliance by some could see the entire deal collapse. Which are the main countries to watch? For countries like Iraq in particular, the road to full compliance will not be easy. Iranian Oil Minister Bijan Zanganeh said after the meeting that the main debate on Saturday had been about Baghdad's poor compliance in May, estimated at just 49% by Energy Intelligence. Opec-plus delegates say Iraq vowed to start working on a plan that would see it gradually reach 100% compliance. It will be tough for Baghdad to meet its target this month, partly because its June loading program has already been issued, and partly because it has contractual obligations to compensate international oil companies operating in Iraq for compulsory production cuts (IOD Jun.8'20). Other countries with a relatively poor track record, such as Opec members Nigeria and Angola and non-Opec Kazakhstan and Azerbaijan, will also be watched closely. Why was this meeting so much smoother than the last one? Thanks to behind-the-scenes work, all countries were on the same page by the time the meeting got under way on Jun. 6. Saudi Arabia and Russia had managed to get all noncomplying states to recommit to their quotas and agree to the new monitoring mechanism. A nascent recovery in demand and rising prices also helped. To get everybody on the same page, delegates say, producers and the Opec Secretariat held a marathon series of conference calls in which five principles were agreed on: Reaffirmation of existing commitments under the agreement; Support for the idea of compensation by countries that are unable to comply 100% with quotas in May and June, through additional cuts in July, August and September; The option of extending the first phase of the supply adjustments by one month; Continuity of the current agreement should be contingent on fulfillment of (1) and (2); and Full and timely implementation of the agreement on the basis of the above conditions for its entire duration is sacrosanct.

Topics:
Oil Demand, Oil Inventories, Oil Supply, Shale
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