The success of the Opec and non-Opec production cut deal ultimately depends on the extent to which it erodes bloated inventories. That depends on compliance and the proof of that pudding will be in the eating.
Market confidence in the deal is a driver of short-term prices. And confidence in the deal plus short-term price movement, provide motivation to comply with pledges and feed willingness to consider an extension to cuts beyond the initial January-June period. The credibility of compliance assessments issued by the participants’ joint ministerial monitoring committee (JMMC) is important.
The JMMC’s overall January compliance assessment was a credible 86pc, achieved thanks to Saudi Arabia ensuring Opec over-compliance, while Russia’s paltry 40pc dragged the non-Opec contribution down. But still, 86pc in the first month, plus vows to improve looked pretty good and was believable.
But the weekend gathering of the JMMC in Kuwait has sown confusion and confusion does little for credibility. How can compliance have improved by 8 percentage points to 94pc in February? An explanation is needed. That the crude market has dipped a little further, rather than regaining the mid-$50/bl prices of last month, indicates this.
Saudi Arabia says it increased output by 263,000 b/d in February. Secondary sources had not spotted this rise but adjusted their numbers accordingly. Taking that adjustment into account, Opec production appears to have risen by well over 100,000 b/d against January.
Leaving aside the non-Opec contributors that were either pretty much compliant in January-February or too small to matter much, Russian compliance scarcely rose at all.
So where did the net additional output cut of 144,000 b/d — implied by an 8 percentage point improvement in compliance — come from in February?
One possibility we kicked around was that it is a preliminary March figure – Russian compliance has picked up in recent weeks, maybe Saudi production has dipped a bit, plus some bits and bobs from here and there. And one minister in Kuwait did mutter something about March levels. But the chances of such an important bunch getting their months confused seem unlikely.
Another thought — along the same lines — was that they were looking at the last day of February, rather than an average for the month.
Then, the answer looked to be blindingly simple. The ministers have stuck to the letter of the law and accepted only secondary source data for Opec production. And the latest Monthly Oil Market Report’s table of secondary source data for Opec countries, now a couple of weeks old, gives a fall of 139,500 b/d from January — add the few extra thousand that Russia cut and we pretty much have 144,000 b/d. It looks like the Opec secretariat and the JMMC have not revised the Saudi production number, although secondary sources have.
The theory is neat but there’s a fly in the ointment. Kuwaiti oil minister Issam al-Marzouq said after the JMMC meeting that Opec countries were 106pc compliant, while non-Opec producers reached 65pc. It’s difficult to see where the implied incremental non-Opec cut of 90,000 b/d came from.
Nonetheless, the February figures look pretty. But what of March? By the next time the committee convenes, the higher Saudi output figure will be in the mix, while Moscow has promised to bring forward the date for achieving its 300,000 b/d cut, which would take out 140,000 b/d, although probably not until April. They might just wing it.
(Argus is one of the secondary sources used by Opec.)