Oil Cartel Tightens Grip on Members to Enforce Production Cuts
In a bid to maintain credibility, the OPEC+ alliance is cracking down on member compliance with oil output cuts. The coalition has implemented a three-pronged plan, comprising formal and voluntary production trims, to ensure members adhere to their assigned quotas. This move comes as heavyweight members, including Iraq and Kazakhstan, have repeatedly exceeded their production limits.
Russia, whose oil exports are sanctioned in the West, has also been known to surpass its assigned quota. To address this, eight OPEC+ members, including Saudi Arabia, will begin returning 2.2 million barrels per day of voluntary cuts to the market starting in December. Additionally, these members will curb their output by another 1.7 million barrels per day throughout 2025 on a voluntary basis.
Undercompliance has been a persistent issue for the OPEC+ alliance, casting doubt on its ability to cut output and stabilize the market. This is particularly concerning given the current market uncertainty, exacerbated by the war in the Middle East, recent stock sell-offs, and a fragile post-Covid recovery in China.
Oil prices have remained subdued for most of the year, with Brent crude futures currently trading at $71.44 per barrel. The Financial Times recently reported that Saudi Arabia is prepared to tolerate a low-price environment and abandon its unofficial $100 per barrel price target to boost its output after December.
Industry experts believe this move is a warning to OPEC+ members who have not been complying with production cuts. Carole Nakhle, founder and CEO of Crystol Energy, stated that Saudi Arabia has shouldered most of the burden of production cuts and is now sending a message to other members.
OPEC+ ministers have consistently maintained that their policies aim to reduce global stocks rather than target a specific price. However, decisions to tighten supplies typically support crude futures in the long term. The International Monetary Fund estimates that Saudi Arabia requires an oil price of $96.20 to meet its annual budget obligations.
Despite economic pressures, Saudi Arabia remains committed to its Vision 2030 program, which aims to diversify the country’s economy away from reliance on hydrocarbon revenues. The kingdom is not targeting an explicit oil price and can reshape its budget or shore it up through alternative, non-oil revenues.
The OPEC+ alliance will continue to monitor member compliance, with its Joint Ministerial Monitoring Committee set to meet on October 2. As the cartel tightens its grip on members, the oil market remains poised for further volatility.
Leave a Reply