OPEC Update: Riyadh Still Committed to Vienna Agreement

Published on March 14, 2017

The Saudi Ministry of Energy just issued a statement affirming the Kingdom is “committed and determined to stabilizing the global oil market by working closely with all other participating OPEC and non-OPEC producers.”

*** The modest and temporary increase in Saudi Arabia’s January output was not intended as a policy signal that the Kingdom was moving away from its commitment to oil output cuts under the terms of the OPEC/non-OPEC output agreement reached in Vienna late last year. ***

We understand the modest increase in crude oil output was entirely in heavy crude going into storage and intended for domestic refineries.

Neutral Zone Threat

That said, Kuwait and the Kingdom are making noises about resuming output from the shared Neutral Zone, and we understand that this is meant as a less than subtle warning the two Gulf producers still have plenty of excess capacity to ramp up output if the other oil producers fail to adhere to their commitments on output cuts.

The warning, it is said, is especially aimed at Russia, which to date has been slow in meeting its commitment of some 300,000 bpd in cuts.

The threat is perhaps more bluff than real, as neither Kuwait nor Saudi Arabia have any intention to break from the Vienna agreement and neither wants to see a deeper slide in oil prices in front of the debt issues on the international debt markets that both are planning through this year.

Iran Agrees to Output Cap

In addition, it is worth noting that Iran has already agreed in principle to the cap on its output at 3.8 million bpd current output, as we noted was likely in our most recent report (see SGH 3/9/17, “OPEC: Riyadh Likely to Extend Output Cuts”).

And Saudi officials remain confident the next figures from the OPEC technical committee in April on the March output figures will indeed show further adherence to the promised cuts by the 26 OPEC and non-OPEC participating oil producers, including both Russia and Iraq.

The bet, for now, is that firm evidence of Russian adherence to the promised trims in output will be important to setting the tone to market pricing and expectations going into the spring, along with the expected uptick in summer seasonal demand. 

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