OPEC: Anything Less Than 100 Percent Compliance in Oil Cutback Deal Is Not Satisfactory

Wednesday February 22, 2017

Despite analysts having praised the Organization of Petroleum Exporting Countries (OPEC) for a 90 percent-plus compliance level in its oil cutback agreement, OPEC secretary-general Mohammad Barkindo Monday told Bloomberg that "anything less than 100 percent is not satisfactory."

"We are going to go for much higher levels of compliance because of the very high level of stocks that we have brought over with us from 2016."

While the high level of compliance was a surprise to many sceptics and has helped hold crude prices above $50/bbl, it has so far failed to lift them beyond the mid-$50's.

Chief among factors keeping oil prices in check has been rising output from other nations including the US, with Tom Kloza, head of global energy research at Oil Price Information Service, last week warning record high shale exports from the country could become the new normal.

Saudi Arabia, Kuwait, and Angola have also been over complying with the OPEC deal in order to compensate for under complying members, including Iraq; the group's second-largest producer is reported to have implemented only about 40 percent of its pledged total.

However this did not seem to worry Barkindo as the cartel targets absolute compliance: "I have got commitment from the highest level of government in Baghdad that they will implement their obligations fully," he said.

"What we are seeing is the efforts they are making in achieving their targets. Each member country has their own peculiar logistical challenges and Iraq is not an exception."

As for the possibility of extending the current 6-month deal, Barkindo joined unlikely non-OPEC cutback ally Russia in declaring it was too early to say.

But the consequences for delaying a decision on the matter could weigh heavily on oil prices, with ABN Amro Bank NV Tuesday warning a failure to extend the deal could send oil back into the $30's.

"If they don't continue with this trend, then the oil price could drop back to where it was two years ago," ABN Amro Bank's senior energy economist Hans van Cleef told Bloomberg.

"Oil prices could easily go back to the low $30s."

Van Cleef also joins many others, including Oil Search managing director Peter Botten, who does not see the OPEC output deal lifting prices any time soon, not least because the market seems to have already priced in OPEC's production cuts.

However, rising production from the US and elsewhere is still an unknown, meaning it more likely prices will be heading lower, not higher: "[The] downside risk has become much bigger than previously," said Van Cleef, "we don't see any upside from OPEC anymore.

"What we do see is more risk of higher production in the U.S., we see a rise in inventories."