Complex Made Simple

What the recent OPEC agreement to return to 100% compliance really means

Investors don’t know what to think about oil and the Organization of the Petroleum Exporting Countries (OPEC).

Prices reflect that indecision, rising last Friday following the oil cartel’s meeting to raise output in 100% compliance of 2017 agreement to cut 1.8 million bpd, only to drop today for the same reason.  Confused?

It’s because no one is sure how much of a production boost OPEC has agreed upon. The oil production cuts raised Brent to as high as $80 in May 2018 per barrel from as low as $27 in 2016.

Related: OPEC playing truth or dare this Friday: Here’s a kickoff preview

Price picture

Brent crude oil prices fell over 1.5% Monday as traders factored in an expected output increase that was agreed at the headquarters of the OPEC in Vienna on Friday.

Brent is at $74.21 per (From $74.9 Friday) barrel while US West Texas Intermediate (WTI) crude futures were at $68.40 a barrel, down 0.3%.

Prices initially jumped after the deal was announced late last week as it was not seen boosting supply by as much as some had expected, according to MoneyControl, a business site.

“Several ministers suggested that (rises) would correspond to a 0.7 million bpd increase in production,” said US bank Goldman Sachs following the announcement of the agreement, although it added that were risks “that Iran production may be even lower than we assume” and that its output could fall further due to looming US sanctions.

Still, Britain’s Barclays bank said OPEC’s and Russia’s commitments would take “the market from a -0.2 million bpd deficit in H2 2018 to a 0.2 million bpd surplus”.

Expert opinion: Oil looking oversold heading into latest OPEC meeting

 The chaotic 100% compliance 

The agreement failed to announce a clear target for the output increase, leaving traders guessing how much more OPEC will actually pump.

OPEC said in a statement that it would raise supply by returning to 100% compliance with previously agreed output cuts, down from 152 percent in May, but gave no concrete figures.

“Unexpected outages in Venezuela, Libya, and Angola have effectively brought supply cuts to around 2.8 million bpd (up from agreed 1.8 million bpd) in recent months,” said Reuters.

100% compliance would mean a nominal output rise of around 1 million bpd or 1 percent of global supply.

“By avoiding setting individual country targets, the deal appears to give Saudi Arabia the leeway to produce more than its official OPEC target and fill the gap left by those like Venezuela who cannot pump enough to meet their official allocation,” added Reuters.

This also applies to Iran who will see fresh US sanctions that will drop output a third by the end of 2018.

Read: WTI is so much cheaper than Brent that OPEC oil tankers are stuck at sea

“Press reports widely noted that actual barrels put onto the market would reach only about 600,000 bpd because several countries have no ability to boost output,” it said.

“The recommendation came even as Iranian oil minister Bijan Zanganeh walked out of a meeting on Thursday night, although he met with his Saudi counterpart (Khalid al-Falih, Saudi Arabia’s energy minister) Friday morning (and agreed to 100% compliance).”

To avoid internal friction, however, the group did not allocate individual quotas, according to Suhail Mohamed Faraj al-Mazrouei, the energy minister of the United Arab Emirates, who was presiding over the OPEC meeting.

The next formal OPEC meeting was set for Dec. 3.