Oil output cuts: OPEC’s double-edged sword

LONDON, United Kingdom – As ministers from the Organization of the Petroleum Exporting Countries (OPEC) gather in Vienna for an extraordinary meeting to mull the impact of the coronavirus epidemic, they must reckon with potential side effects of pushing for more cuts.

At their last meeting in December, ministers decided on cuts of 500,000 barrels per day, shared out between OPEC members and allies in the so-called OPEC+ grouping.

OPEC kingpin Saudi Arabia took on a third of the cuts at 167,000 barrels, and said it would add a reduction of 400,000 more barrels a day on a “voluntary” basis.

That dwarfed the 3 next biggest contributions combined, from the United Arab Emirates (60,000 barrels), Kuwait (55,000), and Iraq (50,000).

Russia, the biggest producer of the OPEC+ group, agreed to a modest cut of 70,000 barrels even though Russian production levels have been slightly higher than Saudi Arabia’s.

Cuts ‘headache’

Beyond the stated level of cuts, OPEC’s credibility rests on the commitment of member states to follow through on them, as seen by Saudi Arabia’s scolding of members who have exceeded their quotas, such as Nigeria and Iraq.

But a policy that relies too heavily on production cuts might reveal one of the bloc’s weaknesses.

With non-members, particularly the United States, showing no letup in the amount that they are producing, a further cut runs the risk of reducing the bloc’s share of the global market.

“Deeper production cuts are a headache for OPEC, which has seen its market share falling to a historical low of 35% recently,” says Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Moreover, not all members have been joining the effort where cuts are concerned: Iran, Venezuela, and Libya have exemptions due to various political and economic crises which mean that output has in any case been falling already.

Iran, reeling under the effect of reimposed US sanctions, has seen its output drop by 40% in two years.

Libya has seen a tenfold fall in production in recent weeks owing to a blockade launched by forces loyal to military strongman Khalifa Haftar in the east of the country.

But the prospect of Libya regaining a normal level of output, or Venezuela and Iran overcoming their crises, is not without problems for OPEC either.

Unless there was a concurrent uptick in demand, OPEC would be forced to consider yet more cuts – and overcome the rows that would almost certainly be sparked by considerations of how to share them out fairly among members. – Rappler.com