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Commentary: OPEC’s Year-One Supply Cut Report Card in Five Charts: Gadfly – Liam Denning


January 30, 2018, by Liam Denning

(Bloomberg Gadfly)

Last year was the first year of OPEC’s latest push to raise oil prices via supply cuts. Now that the data are all in, and with Brent crude having risen by about $10 a barrel across 2017, we can see OPEC was successful — up to a point. Below are five charts assessing year one of the cuts and the important details beneath the headline figures.

When OPEC announced supply cuts in November 2016, it set a reference level based on the most recently reported set of production according to secondary sources (rather than the figures reported by members themselves; all the data used here reflect the secondary sources series). Each country was then assigned a cut to that level, apart from Iran — assigned a small increase due to its recent sanctions-related supply constraints — and Libya and Nigeria, which were too strife-torn to participate.

Overall, the 11 OPEC members excluding Libya and Nigeria complied with the target for output and undercut it noticeably toward the end of 2017:

The targets implied that, relative to the reference level, the OPEC 11 would produce 425 million fewer barrels in 2017 than they otherwise would have. That is in line with the build-up in commercial OECD oil inventories OPEC had observed since the oil crash began when it announced its cuts. As it turned out, the OPEC 11 produced 438 million barrels fewer last year — 103 percent compliance.

But not everyone deserves a gold star.

The Vienna agreement targeted a cut of about 4.6 percent for each OPEC member signing up (Iran got a 2.4 percent increase). But actual compliance varied widely.

Those percentages don’t fully capture what counts, though: absolute barrels kept off the market. In that regard, Qatar’s over-compliance was no doubt welcome, but it meant just an extra 4 million barrels being denied to buyers. This chart shows what was required and what was actually delivered in 2017:

Overall, Saudi Arabia committed to keep 177 million barrels of the market in 2017, but kept an extra 40 million off, too. That excess roughly offset the extra barrels produced by Iraq and Iran. That burden also shifted through the course of 2017. Meanwhile, Angola’s extra contribution of about 12 million barrels almost offset the UAE’s excess, and Venezuela’s additional cuts of 17 million mopped up the rest.

The burden has also shifted over time. This chart shows monthly actual production relative to the cuts agreed in 2016 for Saudi Arabia, Venezuela, Angola and the rest of the OPEC 11:

What’s quite clear there is that a combination of much better compliance by most of the group, combined with a sharp drop in Venezuelan output, coincided with the late rally in oil prices last year; Brent only broke sustainably above $55 a barrel in late September.

What’s missing, of course, are those two other members: Libya and Nigeria. They didn’t have targets but spent most of 2017 staging a recovery in their production and offsetting a large amount of the efforts being made by a handful of their fellow members.

That chart shows the importance of that sudden outbreak of relative discipline among other OPEC members in the second half of the year.

Above all, what success OPEC had in 2017 was due largely to Saudi Arabia once again assuming more of the burden of supply constraints than agreed, as well as Venezuela’s and, to a lesser extent, Angola’s difficulties. Having the other non-OPEC countries such as Russia playing a part was also crucial.

So top marks for effort for some — even if they didn’t do it by choice — and a decent grade for trying overall. Still, 2017’s performance also shows why, having taken this path, OPEC must try to keep it up in 2018 and beyond.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners. 

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant.



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