Promises of Better Compliance at OPEC Summit Met By Crude Losses and Muted Analytical Response

Wednesday August 9, 2017

In a scenario eerily reminiscent of past congregations, the meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Abu Dhabi resulted in feel-good announcements on Tuesday, chief of which was the "full support" of Iraq, the United Arab Emirates, and Kazakhstan for the cartel's production cutback initiative.

But completely absent from the announcements was mention of cheaters Libya and Nigeria, whose compliance analysts say is crucial for OPEC's cutbacks to have any positive effect.

OPEC said in a statement, "Discussions were conducted in a constructive atmosphere and proved fruitful; the conclusions reached with the countries at the meeting will help facilitate full conformity"; but the cartel did not explain how compliance would be increased.

Jabbar al-Luaibi, oil minister for Iraq, will reportedly fly to Saudi Arabia to discuss strategies to achieve OPEC's goals; this follows the Islamic republic claiming in Abu Dhabi that it had fully complied with the cutbacks and that OPEC's mechanisms to monitor compliance are flawed.

As with the outcome of past meetings, it seems that the solution to the output from renegade members will be the Saudis going the extra mile: a source told media that the kingdom will cut crude allocations in September by at least 520,000 barrels per day, or a 10 percent reduction in supplies to Asian buyers - a figure that would be more impressive if the Saudis hadn't already produced pumping volumes for the summer that exceeded expectations.

Still, some observers were impressed by the development: "The Saudi decision to take an ax to its Asian crude allocations shows it means business (and) gives credence to its pledge to do 'whatever it takes' to normalize bulging global oil inventories," said Stephen Brennock, oil analyst for PVM.

However, he conceded that "(While) it helps to lift sentiment in the short term, there's no guarantee of long-term price support as other oil exporters including Russia, the U.S., and Iran rush to fill the shortfall."

The only thing surprising about the outcome of Tuesday's Abu Dhabi summit is lack of reported analytical reaction to OPEC failing to mention how they will get tough on over-producers Libya and Nigeria; but the market expressed its indifference in no uncertain terms, with West Texas Intermediate dropping 22 cents to $49.17 per barrel and Brent dropping 23 cents to $52.14.

The losses were said to have also been caused by oil production as well as exports remaining high in many parts of the world.

More signs that the market will remain in the doldrums for the foreseeable future came courtesy of Bill O'Grady, chief market strategist at Confluence Investment Management, who told Bloomberg that with regard to U.S. crude inventories dropping by 7.84 million barrels last week, there are only about "five more weeks of draws and then inventories start to rise again; you're coming rapidly to the end of the draw season for crude."

James Williams, an economist at WTRG Economics, added, "We're in the last big month of the driving season and the question is, can OPEC balance the lower fall and winter demand?

"There just isn't enough confidence in OPEC yet to get us above $50: that's the big problem."

Earlier this week, Bob Iaccino, co-founder at Path Trading Partners, said, "OPEC has lost a bit of credibility in the fall of the percentage of [cutback] compliance....if they can get their heads together at this meeting, they can get that [market] move they've been looking for."