Opec+ is confusing the market with tangled production cuts

IN TRYING to impress the oil market by adding several rounds of cumulative production cuts, the Opec+ cartel has tied itself in knots. The result is market confusion that’s undermining its unstated goal of keeping oil prices near US$100 a barrel. Its next policy meeting, scheduled for Jun 2 via video conference, looks likely to avoid addressing the issue, however, leaving the ambiguity to persist until later this year – if not longer.

Currently, Opec+ has a hodgepodge of production cuts: One main, or “official”, curb affecting most of its members; two different layers of additional cuts, called “voluntary”, involving a subgroup; another layer of so-called compensation cuts affecting a handful of nations for the failure to implement the official reductions; plus a further layer of compensation cuts affecting a second group of members for not making the voluntary decreases in output.

There’s plenty more obfuscation. Some Opec+ countries measure their curbs based on production while others use exports for the calculation – a completely different benchmark. In addition, not everyone measures just crude, as historically has been the case; instead, Russia, the second-largest member of the Opec+ (Organisation of the Petroleum Exporting Countries and its allies) group, gauges a mix of refined products including diesel and petrol.

Bewildered? I’m afraid there’s even more. The cuts expire on different dates; some on Jun 1, others on Dec 31 and, in the case of the compensation cuts, the dates are ad hoc for each country affected, with different levels for different months.

Finally, the Opec+ deal doesn’t cover three key countries: Libya, Venezuela and Iran. The first is still recovering from a decade-long civil war, the remaining two are under US sanctions. Nonetheless, their production is rising: at about a combined 5.3 million barrels a day, their combined output is the highest since late 2018, and up by about 900,000 barrels a day from a year ago.

To make the situation worse, the oil market is increasingly sceptical about the production levels that Opec+ nations themselves publish, as well as the estimates compiled by a group of independent data providers called the “Opec secondary sources” report.

The market has reason to worry that the cartel is being economical with the truth. In the mid-2010s, Saudi Arabia boosted its production by almost one million barrels a day without anyone, including its fellow Opec production nations, noticing. While Saudi production surged to nine million barrels a day at the time, the kingdom – and the secondary sources – indicated it was no more than 8.3 million barrels a day. You don’t need to take my word for this – a senior Saudi oil official detailed it in his memoirs.

The market currently isn’t doubting Saudi Arabia (although some are starting to ask questions), but the figures from Russia, the United Arab Emirates, Kazakhstan and Iraq are raising eyebrows. Looking at shipping data, it does appear that those four countries are producing significantly more oil than they acknowledge.

If prices are slipping, it’s because there’s too much oil. Demand growth, however, isn’t the main problem: it remains healthy. What’s dragging crude prices down is extra supply. Some are coming from non-Opec+ sources, including Guyana and Canada. But some are coming from within the Opec+ group itself.

Opec+ officials recognise that fundamentals – supply, demand, inventories – are key, but market psychology is equally important. At times, particularly when uncertainty is high as it is today, sentiment can overshadow data. A smoke-and-mirrors approach has its uses, but what the cartel needs today is simplicity, not opacity. A single layer of credible output cuts affecting every Opec+ member equally, focusing on easier-to-measure crude production and with a single expiration date, would provide more clarity.

A year ago, the cartel introduced a system to assess the production capacity of its members, a first step to amending its output policy into 2025, including recalculating the baselines for any output cuts. The sooner that process is completed, the better. What’s clear is that rolling the current chaotic status quo into next year would be a mistake – endangering the all-important US$100 a barrel price target.