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OPEC’S PRODUCTION CUTS OPEC has responded to the decline in oil prices by reducing its output target from 29.045 million barrels per day (bpd) to 24.845 bpd. That constitutes a 4.2 million bpd cut in less than one year. At the last OPEC Vienna meeting in March, the cartel led by Saudi Arabia decided against further cuts in output focusing instead on greater compliance, by member states, with the production cuts already made. According to OPEC, compliance with the proposed cuts is close to 80%. Assuming those figures are accurate, full compliance would require the taking away of an additional 800,000 bpd by member states. Many, including sources inside the International Energy Agency (IEA) believe that the 80% compliance figure is overly optimistic and that real production cuts among OPEC members varies greatly, with adherence in some countries as low as 50% of the proposed cuts. OPEC’S own figures released in March show that only Saudi Arabia cut more output than was agreed to by the cartel. Nigeria and Iran have implemented only about half of their planned reductions. And the cuts by Saudi Arabia, which pumps twice as much oil as OPEC’s second largest producer Iran, may not even be voluntary. Saudi Arabia which has currently reduced its crude production to 7.89 million bpd, or 166.000 barrels less than its target, is having difficulty finding customers for its petroleum products. Saudi Oil Minister Ali al-Naimi was quoted by ArabianBusiness.com in March as saying “there were no customers for more supply for now. Naimi was referring to Saudi Arabia’s two newest projects to produce Arab Extra Light crude, the Shaybah and Nuayyim oil fields. “They are there, but where are the customers?” Naimi was quoted as asking. The two aforementioned projects will soon be joined by a third project, the Khurais which is slated to come online in June and has a capacity of 1.2 million barrels per day. Hence, by June, Saudi Arabia’s overall capacity would rise to 12.5 million bpd. With current Saudi production set at little less than 8 million bpd, that will leave the kingdom with a spare capacity of about 4 million bpd, or a third of its capacity unused. Some within OPEC, especially Algeria, would like to see further cuts of between 500,000 bpd to a million bpd at the next OPEC meeting scheduled for May. If that is what OPEC decides to do, the question then becomes who will pick up the slack and actually adhere to the new proposed quota? For most of its history, OPEC has been less of a cartel and more of a one man show—Saudi Arabia. Saudi Arabia which views $75 as a reasonable price for oil will be the country that will have to shoulder most of the responsibility when it comes to production cuts. In the end, OPEC will be better off not lowering its production cuts any further and instead focusing on ways to implement the close to a million out of the 4.2 million bpd cut already agreed to but not yet implemented. Otherwise, the additional proposed cuts in May will be meaningless.
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