OPEC Cutback Cheating "Inevitable", Say Critics; Actual Cuts Could Be As Low As 700,000 bpd

Tuesday January 3, 2017

January is the “first big test” of the integrity of the Organization of the Petroleum Exporting Countries’ (OPEC) output reduction agreement, according to JP Morgan, and yet more analysts say full compliance among participants is simply not in the cards.

Alex Dryden, global market strategist for JP Morgan, said the first month of implementation will reveal if everyone will honour the deal to cut production by a total of 1.8 million barrels per day (bpd) – but instead of full compliance, he is expecting an 80 percent buy in.

Tom Kloza, global head of energy analysis at Oil Price Information Service, thinks 70 percent compliance is more likely and that this could result in a total cut as little as 700,000 bpd, because the cartel "plays some games with the numbers."

Kevin Book, managing director of ClearView Energy Partners, put it another way: “It's inevitable - somebody's going to cheat," he told CNBC’s Squawk Box.

He added, "You get until January 21 to believe your hoped-for outcomes, and then you converge with reality; historically, OPEC always blows past its targets."

Book also dismissed the notion of coordinated action by OPEC and Russia, pointing out that "We've been waiting to see this come through for decades; is this going to be the time? Probably not this time either."

Yet another naysayer is Chris Weafer, senior partner for Macro-Advisory, who stated  "I simply don’t believe it" when asked if Russia, which vowed to reduce production by 600,000 bpd in the New Year, will comply as promised

He bases his skepticism partly on Alexander Novak, energy minister for Russia, who on Thursday stated that his country would examine the cuts within technical parameters: "It's possible that what the Russians are looking at is saying, well, we were planning to raise production by 300,000 barrels in the first half of next year, but now we can’t do it; Q.E.D., that's our contribution."

Weafer added that even if the Russians were truly intent on cutting output, "it’s difficult to see how they would get the [production] companies to do it – it’s not like an OPEC structure whereby the company takes instructions from up high."

Earlier this week, a Reuters poll of 29 analysts and economists pegged oil prices as rising to a modest $60 per barrel by the end of  next year; the forecast was based on the possibility of OPEC members cheating on their reduction obligations; a stronger U.S. dollar; and a likely recovery in U.S. oil output.