• Joel

Oil Slips With OPEC+ Meeting in Doubt Over Compliance Issues

Oil markets were hit hard today, front-month WTI slipping to briefly below the $36.00 level having been above $38.00 overnight on the news that 1) OPEC+ meeting is unlikely to take place tomorrow (rather, it will likely go ahead as originally planned on June 10th) and 2) OPEC+ meetings are said to be in doubt due to haggling over oil-quota cheating. The June 10th meeting is now said to be contingent on compliance issues being ironed out.

As a reminder, back in April, OPEC+ agreed to cut production by 9.7mln BPD in order to balance oversupplied oil markets (remember when WTI went negative). 

However, compliance data came out a few days ago (i.e., data showing how well countries have stuck to their pledges or not) and showed very poor compliance by (shock) Iraq and Nigeria. These two countries have historically shown very poor compliance, much to the ire of the Saudis and Russians - reportedly Iraq failed to get some of its domestic producers to cut output as much as the country had agreed to. 

Overall, Energy Intelligence estimated that OPEC+ achieved an 86% May compliance rate with the production cuts of 9.7mln. 

Other OPEC+ nations are angry at the poor compliance being shown by some nations and it now seems as though this whole issue over compliance is going to need to be ironed out before we can get any extensions to the current pact (which expires at the end of July). 

In terms of an extension to the output cuts, which originally was the point of the coming OPEC+ meeting, the Saudis and Russians are said to have reached broad agreement on the need for an extension (between 1-2 months). 

But as noted, compliance needs to be sorted out first, and the risk of poor compliance derailing any prospect for an output cut extension is what has weighed on crude oil markets today. 

The Saudi’s might have the answer, however;  the FT reported, citing sources, that Saudi Arabia is set to bring 1mln BPD of production back online. As a reminder, the Saudis said they would cut output by an extra 1mln BPD on top of its OPEC+ commitments last month. 

This sounds like a threat against those countries who have not shown full compliance to the OPEC+ deal - start complying, or no more voluntary cuts! 

Oil actually appears to have reacted positively to this news. Does the market think that Saudi threats will work? 

Either way, the next few days will be interesting. If this whole compliance issue can be sorted, expect crude oil markets to rally.



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