OPEC+ Delays Unwinding of 2.2 MMb/d Production Cut

The agreement by OPEC and several non-OPEC members to cut crude oil production by a total of 1.8 million barrels a day (MMb/d), which caused a rise in crude prices, kicked in on January 1. Now, more than three weeks in, many in the market remain skeptical that the deal will hold, and are on the lookout for the slightest hint that parties to the agreement may be—for lack of a kinder word—cheating. In today’s blog, “Won’t Get Fooled Again—Monitoring Compliance With The OPEC/NOPEC Deal To Cut Production,” we recap the agreement’s terms, examine how participating producers might try to skirt the rules, and discuss ways to check that everyone is acting on the up and up.

Crude oil is demonstrating yet again its penchant for what markets hate most: surprise. Last month, the Organization of the Petroleum Exporting Countries (OPEC) and collaborating governments were carefully easing the production cuts with which they steered the market through an oil-demand crisis caused by the COVID-19 pandemic. Demand was recovering as economies reopened after being locked down during most of 2020 and early 2021. And the near-month futures price for light, sweet crude on the New York Mercantile Exchange (NYMEX) — having closed below zero for the first time ever on April 20, 2020 — rose above $70/bbl for the first time since October 2018. Until mid-June, the market’s main concern was the potential for a supply surge if Iran escaped sanctions by agreeing with the U.S. to again suspend nuclear development. Surprise! Only days after his election as Iranian president on June 18, Ebrahim Raisi announced new limits on what his government would negotiate regarding nuclear work and said he would not meet with U.S. President Joe Biden. Suddenly, new oil supply from Iran looked less imminent than it did before Raisi’s election. Then July arrived. Surprise! OPEC members and nonmembers, collectively known as OPEC+, which had been voluntarily limiting production ended an important meeting without agreeing, as had been expected, to extend their phasedown of supply restraint. Suddenly, the market had to wonder whether the result would be too little supply or a price-crushing production spree if OPEC+ discipline collapsed. In today’s blog, we examine how these developments relate to each other in the twin contexts of a rebalancing oil market and of past oil-supply management.