Opec+: Once bitten, twice shy

The group has delayed a decision on extending production cuts to allow it to review more detailed supply and demand data

Opec/non-Opec ministers used their first Joint Ministerial Monitoring Committee (JMMC) of the year to signal to the market and Washington that they aim to strengthen their output restraint agreement by demanding stronger compliance.

Ministers in the group, collectively known as Opec+, unequivocally stressed at the meeting in Baku, Azerbaijan, that their decision-making is driven by supply and demand fundamentals, not political or market pressures. And the JMMC is emphatic that the group will not repeat the same mistake as last year, when it eased production restraints because of expectations of a supply shortfall ahead of US sanctions on Iranian exports. "We need to see that additional volumes are required before we go ahead and raise production," UAE oil minister Suhail al-Mazrouei tells Argus. "We are not going to produce more just on expectation."

The JMMC ministers reiterate that the group takes its lead from market fundamentals — a not so subtle reference to tweets from US president Donald Trump calling on Opec to increase production because oil prices have risen. At close to $69/bl, Brent is up by 27pc since the start of 2019, and approaching the $73/bl mark that last year prompted Trump to deliver his first Twitter salvo at Opec as president. More such tweets are likely if the US' looming deadline of 3 May to decide on renewals of Iran sanctions waiversspurs a further rise in oil prices. But Opec+ insists it will stay the course and not be swayed by such calls.

The alliance opted to cancel the full Opec+ ministerial meeting scheduled for April and postpone a decision on whether to extend the production cuts beyond the first half of the year until their 25-26 June meeting. The consensus is that a decision in April is premature. The delay to June will allow time for the group to see more complete data on supply and demand fundamentals.

But there remain conflicting views among JMMC members on the market outlook, raising the prospect of difficult negotiations between producers. Saudi Arabian oil minister Khalid al-Falih sees OECD oil inventories at levels "well above what we consider to be normal", while some others, including Russia, think that the market is already rebalanced.

Postponing the decision to June will also give Opec+ time to assess the market impact of whatever decision the US makes in early May about sanctions waivers for buyers of Iranian crude. Russian energy minister Alexander Novak argues that US sanctions have distorted the near-term outlook.

Saudis take the strain

The JMMC reports overall compliance by participating countries at 89pc in February, up from 83pc in January. But much of this improvement comes down to Saudi Arabia, which has sharply reduced production since the start of this year. Al-Falih says Riyadh will produce 9.8mn b/d in March and slightly less than that in April, around 500,000 b/d below the country's target of 10.31mn b/d.

Saudi Arabia's deep cuts have been offsetting overproduction by other members, including Iraq, Nigeria, Russia, Azerbaijan and Kazakhstan. Al-Falih acknowledges the difficulties that some of these countries face in reducing output quickly, but stresses that Saudi over-compensation will not continue indefinitely. He says all producers have recommitted to lowering their output "to make up for the first two months" of under-compliance.

The UAE and three of Opec+'s least compliant members to date — Nigeria, Iraq and Kazakhstan — have been drafted into the JMMC, signalling a hope that membership will provide an extra incentive to improve their adherence. Founding JMMC member Oman has now left the committee, leaving it with nine members when it next meets in Jeddah in May.

Opec production