More dissension in OPEC’s ranks

The Organization of the Petroleum Exporting Countries recently extended production cuts to reduce the global crude-oil supply glut in order to raise slumping prices.

Up until this point, OPEC members have slowly but quietly slumped to a record-low 78% compliance rate for the cuts with countries like the United Arab Emirates and Venezuela pumping more than agreed last month.

However, no member country has publically come out and announced that they are unwilling to comply with the agreed cuts, until Monday. Ecuador, an OPEC member nation, officially announced that the country needs money and will be raising their monthly output of crude.

Ecuador is the third smallest OPEC country, so its total crude oil production doesn’t greatly affect the global oil market. But OPEC has its hands full right now and doesn’t need one of its members publically opting out of the production cuts agreement.

OPEC is dealing with the diplomatic crisis between Qatar and a Saudi-led block, and dealing with unconventional well producers taking the market shares that OPEC cuts. While OPEC is trying to reduce the daily production by 1.8 million barrels of oil per day, unconventional well producers, led by American shale, have taken up the slack and filled the gap left by OPEC.

As a result, Brent crude – the global oil benchmark – has dropped 14% since OPEC made the initial announcement of production cuts last November. Brent crude traded below $49 a barrel yesterday.

Ecuador plans to start pumping nearly 545,000 barrels per day instead of the agreed upon 522,000 barrels per day. Before the OPEC mandated cuts, the small South American country was producing 548,000 barrels per day, so their near-future output will almost match the pre-cut production.

Oil Minister Carlos Perez commented on the announcement, “There’s a need for funds for the fiscal treasury, hence we’ve taken the decision to gradually increase output. What Ecuador does or doesn’t do has no major impact on OPEC output.”

The smaller OPEC countries’ economies rely on higher oil prices to function properly, and the production cuts are beginning to take a toll. “Ecuador’s latest statement will not matter for global balances, but it shows the challenges for OPEC members given that the cuts failed to raise prices,” added Amrita Sen, the chief oil analyst at London-based Energy Aspects Ltd. She also fears that Ecuador’s announcement will, “again give rise to fears of the deal falling apart.”

Since Ecuador stood up and decided not to follow OPEC’s production cuts, the fear is that other countries will soon follow suite. “Other small OPEC members may now argue they also need extra money,” said Torbjorn Kjus, an analyst out of Oslo, Norway’s DNB Bank ASA.

Kjus also added, “They should understand that this might hurt the whole deal.” He also suggested that Saudi Arabia might retaliate in frustration and force oil prices back into the $20 a barrel range and take the market back to where it was in 2016.

Article written by HEI contributor Raymond Arrasmith.

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