Opec+ overproduction persists as oil price sags

Umit Bektas/Reuters

• Opec+ quotas exceeded
• Excess supply impacts price
• Saudi Arabia bearing brunt

Despite a fall in production in September, Opec+ members are not adhering to cuts they have committed to, leading to excess supply and flagging prices, industry experts say. 

Quota compliance has always been a vexed issue within Opec and Opec+ but oil demand is now so subdued that Saudi Arabia may have to act, the experts believe.

On Wednesday, Brent traded at slightly over $71 a barrel, while WTI dropped short of $68 per barrel. The International Monetary Fund says that Saudi Arabia, for one, needs prices of $96 per barrel to cover the costs of government spending, Bloomberg reports.

The oil bloc – which is made up of the Organisation of the Petroleum Exporting Countries and allies led by Russia – is supposed to start easing voluntary cuts on December 1, adding 180,000 barrels per day (bpd) back to the market.

“The lack of compliance among key members poses challenges to Opec+. It undermines the collective strategy to stabilise oil prices, which can lead to market instability,” says Mehmet Öğütçü, CEO of Global Resources, an advisory group.

Saudi Arabia is bearing the burden of most Opec+ cuts, reducing its output by 2 million bpd over the past two years. It could decide to unwind its cuts faster than planned – that is flood the market – if countries continue not to respect their quotas, according to briefings given to the Financial Times.

Iraq and the UAE exceeded their production quotas the most in September. Together they overproduced 710,000 bpd, according to the International Energy Agency, a Paris-based watchdog. Iraq produced 4.26 million bpd in September. Its quota, including a compensation plan, was defined at 3.9 million bpd.

Iraq, the second largest Opec producer, reduced production, but “the difficulty lies in balancing domestic demands with Opec+ obligations,” says Öğütçü.

He says that Iraqi over-production is likely to worsen if the Kurdish regional government, based in Arbil, resumes exports via Turkey to Ceyhan port on the Mediterranean.

Kazakhstan and Russia are also identified as Opec+ members that are exceeding their quotas. The two countries, along with Iraq, have agreed to compensate for earlier pumping above agreed levels and have – in theory – established a plan for additional cuts until September 2025.

Russia maintained output, but exports hit four-month highs in October. The country exported on average 3.5 million bpd of crude in the four weeks to October 20, mainly to Asia, which takes 95 percent of Russian crude. 

Osama Rizvi, an analyst at Primary Vision, an analytics company in Houston, says that efforts by Opec+ to stabilise prices have been undermined because of a weak global economy, which has hit global demand, slowing manufacturing activity, and a rise in non-Opec oil production.

In addition, non-Opec supply is expected to add around 1.5 million bpd in 2024 and 2025, with US, Brazil, Guyana and Canada leading the way.

“Each country is now focused on setting their own house in order,” says Rizvi.

Opec+ is holding about 5.8 million bpd or 6 percent of global crude oil demand off the market, according to Reuters. 

Kate Dourian, non-resident fellow at The Arab Gulf States Institute in Washington, says that Saudi Arabia has not been strict when it comes to Russia because it wants to maintain Opec+ cohesion.

“Compliance has become vital for Saudi Arabia and the Opec+ as they prepare to start easing voluntary cuts,” she says.

“Opec+ will want to make sure that the fundamentals support an increase, particularly at a time when demand growth in China has weakened,” says Dourian.

Analysts at Fitch BMI, a research firm, believe that Opec+ may wait until April before bringing back barrels to the market “because of the weaknesses in oil prices”.

“I believe we might see another redux of the oil price war as we saw back in 2014 because the production cuts cannot go on forever,” says Rizvi.