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OPEC: Who’s cutting, who’s cheating

There was one significant part of last year’s OPEC deal that was absent, and it may prove to be its undoing. Just weeks into the deal and days from a first inspection, there are rumours not everyone is playing by the rules.

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On the face of it, reports are positive. Output fell in December from a record high, the result of planned cuts and forced cuts – Nigeria was not able to export any Forcados crude after a pipeline was attacked.

However several reports raise concerns about Iraq reneging on the deal, with the first – The Wall Street Journal – talking of ‘an unexpected twist’: “instead of cutting its crude production by 4% as promised,…Iraq instead plans to increase crude oil exports in January.” quotes Omar Al-Ubaydli from George Mason University who believes that it’ll be the first to cheat as “Baghdad needs oil revenue to continue fighting the Islamic State and lacks control of all of its oilfields.”

There’s also the issue as raised by about how Iraq can fulfil its contractual commitments to international oil companies occupying fields in the south. Reuters saw contracts in November last year and found out the companies get compensation if production is curtailed. CNBC quotes Jessica Brewer, Wood Mackenzie’s principal analyst for Middle East and North Africa upstream oil and gas as saying, “Of the Middle East producers that agreed to the cuts, it’s probably the one that has the most [international oil company]-operated production. There are a lot more parties involved, which makes it more complex.” Information obtained by Thomson Reuters suggests exports exceeded a record high in November.

Despite this, last week Iraq said it had already started to put in place the measures needed to reduce output. That’s at odds with the official government record the WSJ says it examined, which suggested exports would be increased by 7%, however Prime Minister Haider al-Abadi is already putting the blame squarely on the Kurds, claiming, “The region is exporting more than its share, more than the 17 percent stated in the budget.” Under the 2017 budget – passed in the face of a boycott by Kurdish representatives – the region is allowed to export 250,000 bpd from oilfields under its control. Iraq is exasperated by a lack of control over Kurdish exports due to the pipeline to Turkey completed in 2013.

Others appear to be playing ball – like Kuwait which cut production to 2.7m bpd by last Friday. Doing so meets its requirement under the deal. Saudi Arabia too met its target of 10.05m bpd – cutting at least 486,000 bpd. These positive moves have supported a positive market response – process increased nearly 9% in December and oil futures finished on Friday having climbed for a fourth straight week.

That leads us to the next fly in the ointment. Increases in oil prices could encourage producers who haven’t signed up to the agreement – namely those in the US, Libya and Nigeria. notes FGE consultancy is predicting a sense of fellowship is missing; “With output in Libya and Nigeria probably rising this month to some 700,000 barrels a day and 1.7 million barrels a day, respectively, we estimate that actual total OPEC output in January could be closer to 33.5 million barrels a day than to the official ceiling of 32.5 million barrels a day.”

Reuters reported on Friday that Iran has pressed the sale button on more than 13m barrels of oil it had held on tankers at sea for the past three months. As many as 30 tankers had been afloat since the summer holding 29.6m barrels, but now data from Thompson Reuters Oil Flows shows the volume of oil at sea has dropped to 16.4m.  Iran scored a major goal when it was not only excluded from the November agreement to cut production but allowed to increase it as well, and Reuters quotes unnamed industry sources who say that it, “is also looking to use the opportunity to push into new markets in Europe, including Baltic and other central and eastern European countries.”

The problem is that there is a distinct lack of consequence for any country that’s reneges on the deal. As Al-Ubaydli puts it, “There is no mechanism to punish violators. So even if they detected a violation, the only thing they can do is to retaliate by cheating.” The fear is, once the foundations start to crumble, others may quickly follow. And those who benefit from pain suffered by the group en masse may enjoy a short-lived honeymoon.