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.
Much of the 17% run-up in crude oil prices since September 2016 is attributed to the hope (then the fact) that OPEC, Russia and a few other crude producers that are not part of OPEC would agree to significantly reduce their oil output in the hope of tightening the international supply/demand balance and boost crude prices. As we said in Is This The Real Life? Is This Just Fantasy?, OPEC’s 13 member countries on November 30 (2016) agreed to reduce their output (from October 2016 levels) by 1.2 MMb/d starting on January 1 (2017). Ten days later, on December 10, 11 non-OPEC (NOPEC) countries (including Russia and Mexico) joined in, saying they would collectively cut their production by another 558 thousand barrels a day (Mb/d), also effective on New Year’s Day. The OPEC/NOPEC commitments will run for at least six months, and may be renewed for additional half-year periods after that—all with the hope of maintaining oil prices at levels that work to all producers’ advantage.
Now, all eyes are on these OPEC/NOPEC producers to see if they do, in fact, reduce their production as promised, and to check for any rule-bending by deal participants who may be tempted to make a few extra bucks (or, more accurately, a few riyals or rubles or pesos) by producing some extra crude they can sell at early 2017’s propped-up prices. Judging from previous experience with such accords, the temptation of higher prices is difficult to resist for countries that are dependent on oil exports for much of their income.