OPEC+: Easing production cuts in October and non-compliance challenges of the members

 

Amidst the volatility in the Middle East and the evolving concerns over the health of the global economy as a whole, the ministers of the OPEC+, OPEC countries plus Russia, are facing the same old dilemma before their next meeting - restoring the production cuts as promised in October or maintaining the status-quo.

The key members of the OPEC+ are no strangers to walking a tightrope, when it comes to the crude oil production - or cuts. The changing ground realities, however, are leaving the organization between the rock and the hard place, indeed.

In theory, a significant cut in oil production naturally leads to an increase in the price of the commodity, perfectly in line with the very basic law of economics - the lower the supply, the greater the demand or vice versa - that by extension, leads to a hike in oil prices in proportion to the drop in supply.

In the past few months, however, the pattern has been just impulsive rather than a reliable show of consistency. In short, the production cuts did not produce the trick intended: the price of oil did not go through the roof, defying certain influential investment bankers who outrageously predicted prices reaching $100 per barrel or even more.

Although the delusional optimism has since been abandoned, the oil producers still tend to seek solace from questionable forecasts that eventually do more harm than good, as the latter just take the focus off the factors that really matter and make matters worse for the oil producers, especially those of the OPEC+.

It is crystal clear that the growth of demand for fossil fuel is slowing from every conceivable data chart available at present. In addition, even the global organisations that claim to be specialized in the field of energy, such as the IEA, International Energy Agency, clearly say that is the case beyond 2024, well into 2025. 

Annual Oil Demand & Growth - IEA

When the IEA released the above data, it had not taken into account the current volatility in the Middle East that stemmed from the attack launched by Hamas against the state of Israel  October 7, 2023. The events, since the war broke out in the Middle Eastern theatre, had the potential to push the oil prices way above $100, but it didn't.

On the contrary, the oil price has been on decline with intermittent, inconsistent spikes while making the conflict in the Middle East redundant, when it comes to determining the price of crude oil. 

For instance, the oil price that fell below $80 during the last week, suddenly got a boost on Monday due the tit-for-tat attack between Israel and Hezbollah on Sunday, the day before. As of 15:40 GMT, price of WTI and Brent were at $77.54 and $81.51 respectively. 

Against this backdrop, the OPEC+ is weighing its options to determine whether to ease the production cuts in October, 2024 while extending the production cuts into 2025, as promised at the 37th ministerial meeting of the cartel. The next ministerial meeting is scheduled to be held on December 1, 2024.

Although the members of the OPEC+ agreed in principle to stick to the production plan outlined by the DoC - Declaration of Cooperation -at the last meeting, the organization had been forced to rely on independent organisations to see whether the members are keeping to their promises; much to its disappointment, it has not been the case, though. 

Iraq, Kazakhstan and Russia, for instance, have not been complying with the DoC; they have been overproducing, exceeding their respective quotas. These members have come under pressure from the bigwigs of the OPEC+, notably Saudi Arabia, to compensate for their overproduction. Iraq and Kazakhstan have complied with the requests and provided the OPEC+ with their respective compensation plan, 

Judging by the past overproduction scenarios, despite agreeing with the exact opposite at the outset, the new compliance remains to be seen, though.

In a separate development, the OPEC+ announced on Monday, August 12, that the global oil demand had been revised down from 2.25 million bpd to 2.11 million bpd, citing the economic worries in China and the trends stemming from transition to cleaner fuels from fossil fuels.

In light of these developments, the promise made by OPEC+ to ease the production cuts from October seems to be easier said than done. On the other hand, prolonged production cuts will not go down very well with relatively poor members of the organization, especially if that is the only way they can fill in their coffers. 

In short, non-compliance with the so-called DoC and massaging the statistics can become the new normal, forcing the more prominent members of the OPEC+ to employ more independent bodies to supervise the number game. 

Furthermore, analysts believe there is potential for a more ominous development, if OPEC+ keeps cutting down on oil production just to shore up the prices; it may lose its market share to non-OPEC members such as the US, Canada and Guyana that have been boosting their production by leaps and bounds. 

All in all, the OPEC+ is going to face a testing time in the coming months when it comes to maintain the unity of the organization while maintaining production cuts. It is going to be a monumental challenge for the 60-year-old body, if oil price remains in the doldrums, as it is now.