Phoney war

When Opec and its non-member allies agreed combined production cuts of some 1.8mn b/d for six months from the beginning of this month to speed market rebalancing, there were going to be two keys to success in pushing prices higher — sentiment and reality.

The November and December meetings determined sentiment, and compliance monitoring will determine the reality (or, rather, calculations, approximations and guesstimations of reality). So, without a barrel cut in anger as it were, front-month Brent shifted from a mid-$40s/bl range in the few weeks prior to Opec’s 30 November meeting to mid-$50s/bl in December. Now we are in the period of phoney war — the cut period has commenced, the game’s afoot. But just days into a six-month period over which cuts will be averaged, current declarations on production are little more than re-affirmations of intent. That’s why UAE oil minister Suhail Mohamed Faraj al-Mazrouei emphasised that his country and its Gulf Co-operation Council friends have been telling customers that allocations are being cut. And it’s why his Saudi counterpart Khalid al-Falih’s announcement today that “we already have [implemented the cuts] — we have exceeded them” was backed by him too underlining that customers have seen incremental volumes cut, something price reporting agencies such as Argus could verify.

Pending assessments of compliance over a credible period of time, both Opec and non-Opec cut pledgers are doing a good job of keeping sentiment buoyant.

As we’ve seen, al-Falih and al-Mazrouei have said their piece. And earlier today Kuwait’s newly-appointed Issam al-Marzouq made his play for the Stakhanov Cup, saying Kuwait is leading by example and has already exceeded its 131,000 b/d cut commitment.

And Algeria’s Noureddine Boutarfa has now claimed his country is over-complying in January.

Not to be outdone, Iraq’s Jabbar al-Luaibi declared: “We are definitely, definitely, certainly abiding with the Opec obligation and the Opec agreement.” You don’t get much more definite than that. Earlier in the week, al-Luaibi quantified the production cut to date at 160,000 b/d of Iraq’s pledged 210,000 b/d. Given that Iraq was initially resistant to the use of secondary source estimates of its production as a basis for cuts and, at one point, looked as if it would seek an exemption, al-Luaibi’s remarks are a morale booster.

The wrinkle — which just underscores the lack of value in trying to make the numbers work less than two weeks into a six-month arrangement — is that the monthly loading schedule for February signposts Basrah loadings hitting a 16-month high of 3.64mn b/d. Of course, exports are not output, and schedules are not actual exports, and domestic demand might have slipped, and we don’t know what Kirkuk exports will run at.

Venezuela was quick to publish a note in the official gazette saying that state-owned PdV has been formally instructed to cut by the allotted 95,000 b/d from 1 January. Angola said this week it has implemented its 78,000 b/d cut. And if the strike by Shell workers in Gabon lasts, that country will achieve its cut, like it or not.

Beyond the Opec battalions, bit part players Oman and Kazakhstan say they are doing their bit. And the non-Opec country that matters — Russia — says it is meeting its obligations, although the cynic might query what Moscow thinks its obligations are.

The first meeting of the ministerial monitoring committee, set for Vienna later this month, won’t be able to do more than agree the parameters for measuring compliance with the agreed cuts. But, pending reality checks, expect more sentiment-boosting comments to keep the phoney war going and prices firm.

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