Positive Rumours of Further Saudi Export Cuts Dampened By Ecuador Ditching OPEC Deal

Ecuador will no longer comply with its pledge to the cartel and will instead boost production. File Image / CC0 / Pixabay

Any positive sentiment generated by rumours that Saudi Arabia is considering cutting exports further under the Organization of the Petroleum Exporting Countries (OPEC) cutback agreement was dashed by news that Ecuador will no longer comply with its pledge to the cartel and will instead boost production.

The Saudi rumours stem from a report from Petroleum Policy Intelligence stating that the kingdom is considering cutting exports further by as much as 1 million barrels per day (bpd) to offset the rise in output from Libya and Nigeria.

While at face value this is what the market needed to hear and indeed triggered a 2 percent rise in crude prices on Tuesday, Michael Loewen, a strategist at Scotiabank, echoed the sentiments of the analytical community by remarking, "The market is waiting for the proof in the pudding; there's a lot of chatter these days."

More concrete - and far more troubling - is the news that in an attempt to help its failing economy, Carlos Perez, oil minister for Ecuador, has declared his country to be no longer compliant with the OPEC quotas of a 26,000 bpd cut to production; prior, Ecuador achieved a mere 60 percent compliance, putting its output at 545,000 bpd.

Even though Perez argued that "what Ecuador does or does not do has no great impact on OPEC's total output," the pullout is seen as the ominous first step in what could be a domino effect of harried members deciding the strain of fulfilling quotas at the expense of their own well being is not worth it.

Zerohedge summarized the sentiment by noting, "And so with one country of the 11 OPEC states who pledged to throttle their production already out of the agreement just six months after it was implemented, the next logical question is how much longer can the deal last in its entirety, and, obviously, who will defect next citing a `difficult economic situation' - something virtually every OPEC member nation can claim."

In a similar vein, Torbjorn Kjus, an analyst at DNB Bank ASA, remarked, "They should understand that this might hurt the whole deal; if you guys don't want to participate, then let's just dump the oil price down into the $20s and see how funny that is."

Ecuador's announcement came as a surprise to many experts who thought Venezuela would be the first OPEC member to opt out of the cutback agreement, but the cash-strapped republic may not be far behind: Oilprice.com reports that its national oil company, PDVSA, is facing default, which "could potentially lead to a complete crash in oil production, a doom scenario for the country."

On Tuesday, PDVSA was ordered by a Caribbean court to cooperate in the sale of 500,000 barrels of crude oil in its dispute with units of Russian shipping firm Sovcomflot; the order is widely viewed as evidence that even political allies of Venezuela such as Russia are losing patience with PDVSA's payment delays.

Even though OPEC is used to earning bad press, it has been a particularly bad week for the cartel, with reports a day ago that total compliance within the organization has slipped below 100 percent to levels last seen in February, with increased production in Angola, Iraq, and Saudi Arabia.