Opec heavyweights are cheating on their targets

Part of the reason why OPEC is failing to keep prices high is because its members are failing to keep to their output targets. In March the group’s leaders and Russia extended production cuts, vowing a reduction of 2.2m barrels a day (b/d), or 2% of global supply, until the end of June, on top of 3.7m b/d of previously agreed cuts for 2024. Yet the cartel is now overproducing so much that its daily output in 2024 is little changed from the last quarter of 2023. This will create tensions when members get together to decide their strategy at OPEC’s ministerial meeting on June 2nd.

Cheapish oil reflects other factors, too. Tensions between Iran and Israel are cooling, which has reduced the risk premium that prompted price spikes in April. Inflation is falling too slowly for America’s Federal Reserve to cut interest rates soon, even as the country’s economy decelerates. Chinese growth remains tepid. And new supply is coming on to the market from outside OPEC, especially America, which is pumping record amounts.

But OPEC’s surprisingly strong output is also helping things along. For most of the past two years the alliance has produced less than the total allowed by its quotas. That changed in January, when the newest cuts were implemented. Since then the cartel and its partners have overshot their target every month. In April the excess neared half a million b/d—a level last seen three years ago. As a consequence, global oil stocks have continued to build, despite expectations to the contrary.

OPEC and its allies have two types of cuts in place: compulsory reductions, which apply to all members via quotas, and voluntary cuts, announced by a subset of big producers, including Saudi Arabia, Russia and the United Arab Emirates. The problem is that individual producers have an incentive to cheat, selling above their quotas and free-riding on the efforts of others to keep prices high, so as to increase their own revenues. Analysis by Jorge León of Rystad Energy, a consultancy, shows that some countries are misbehaving on a grand scale. Last month the voluntary cutters produced 806,000 more b/d than called for by their collective targets.

The worst offenders, Iraq and Kazakhstan, have consistently flouted commitments. Russia, which is ever less compliant, appears to like the effect of announcing cuts but to dislike selling less, perhaps because it needs to finance its war effort. Some estimates suggest that even Saudi Arabia, the cartel’s de facto leader and traditional enforcer, has been overproducing slightly. These countries must hope that producers such as Azerbaijan, Nigeria and Sudan continue to pump below their targets, as they are doing now, because of graft, underinvestment and war.

In the short term, the cartel may see some respite. Global oil demand is expected to strengthen in the coming quarter. Having undergone maintenance this spring, many refineries will come back online and seek more crude. Demand for petrol will rise, too, as tourists travel for the holiday season. Most analysts expect Saudi Arabia and its friends to keep their announced cuts unchanged for the rest of the year. This may add $10 to the oil price, reckons JPMorgan Chase, a bank.

But OPEC’s strategy will come under even more strain in 2025, when extra supply from non-OPEC members is expected to hit the market. In May Canada inaugurated a long-awaited, $25bn pipeline that will allow it to export much more oil, encouraging its energy firms to boost production. Argentina’s shale-men are ramping up output. And a flurry of offshore drilling projects, which have long lead times and are largely insensitive to prices, will be finished in South America.

This will make it difficult for Saudi Arabia to maintain high levels of production without flooding the market. In the interim, the kingdom might gain some room for manoeuvre by lifting production a little, so that it can cut again next year without losing too much market share. The remainder of 2024 provides just such an opportunity, argues Walt Chancellor of Macquarie, a bank. It is therefore possible that Saudi Arabia will decide to unwind some of its cuts, prompting others to follow. A decision to do so would delight Joe Biden, whose chances in November’s presidential election in part hinge on prices at the pump, as well as central bankers with an eye on stubborn inflation.

Such a decision would do little to quell dissent in OPEC, however. Many members think the quotas are unfair, and do not reflect recent increases of capacity. By 2025 all current output cuts—compulsory or not—will expire. On May 14th Kazakhstan opened the debate about quotas for next year by arguing that it should be granted an increase (it has a mega-project near completion). When the last big revision happened, in 2023, there was enough acrimony to delay a meeting by several days and to prompt Angola to leave the alliance.

This time mistrust is so high that the group has commissioned three Western firms to put members’ production capabilities under the microscope. Their findings will not come in time for the meeting on June 2nd, leaving oil watchers in the dark about the cartel’s intentions for next year. But one thing is clear. OPEC is unlikely to reach a compromise that pleases everyone, meaning the temptation for members to misbehave will only grow.

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