Opec+ supply boost has consequences for Baghdad and Astana, more so for Houston

Opec and its main driver, Saudi Arabia, have decisively shifted gears over the last two months, from neutral to forward. The questions are, who are they trying to outrace, from three plausible candidates? And, how successful will they be ? In March, the eight countries in the wider Opec+ grouping adhering to additional voluntary production cuts agreed finally, after months of pauses, to start returning production to the market. This would be gradual, but was particularly important to the UAE, which would see its baseline production target increased by 300,000 barrels a day, about a tenth of current output. This was perhaps expected. More surprising was last month’s move, when the producers’ subgroup announced it would effectively bundle three monthly increases into one, raising output limits by 411,000 bpd for this month. The Opec+ eight did the same again this month for June levels. A complex schema of compensation cuts per country and per month, intended to make up for past overproduction, means real increases should be less than the headline. Nevertheless, a more aggressive policy, a willingness to accept lower oil prices for a while, indicates that Opec+ will start regaining market share. At this rate of increase, the voluntary cuts of 2.2 million bpd, announced in November 2023, would be fully unwound by about September. Half a million barrels a day of compensation cuts, though, would still be in effect then, and they drag on for some countries as late as next June. Expected demand growth this year ranges from 730,000 bpd, in the view of the International Energy Agency, to Opec’s forecast of 1.3 million bpd. The IEA predicts production growth outside the Opec+ alliance at 1.3 million bpd. Prices already softened last year, the economic outlook has darkened, so to absorb the Opec+ increases, somebody must lose out. These moves clearly reflected Riyadh’s frustration over some members not fulfilling their commitments, particularly Kazakhstan and Iraq. But there will be another, unstated, casualty. Kazakhstan’s Energy Ministry has said it has no plans to cut output in May. Its intended crude oil production of about 1.75 million bpd compares to its compensated target of just 1.37 million bpd. Its extra compensation cuts actually reach a maximum in October before dropping off, so it faces a lengthy adjustment. Iraq is the other problem member. It is allowed 3.909 million bpd in May, again accounting for compensation. Its March output, according to Opec’s own figures, had dropped a bit on February, but was still over-limit at 3.981 million bpd. Its compensation cuts ease off a bit after June. The others were close to their allowable levels in March, and their agreed compensation cuts are zero or small. The uncertain impact of sanctions on non-target bound Venezuela, Iran and Russia might take some more oil off the market, but could also restore it depending on the path of Washington’s negotiations with Tehran and Moscow. How effective will the production increases be in restoring compliance? Iraq’s big fiscal deficits, fast-growing population, severe infrastructure shortfalls and shaky domestic politics make it the most vulnerable to lower oil prices. However, it is also the Opec+ member, alongside the UAE, with the biggest realistic production growth plans, which are mostly financed by foreign investment. Under pressure, it has already improved compliance substantially, cutting about 190,000 bpd so far this year. Its remaining overproduction is not that big, at least on Opec’s own figures. And Baghdad will claim special conditions: particularly, the continuing legal deadlock on exports from the semi-autonomous Kurdistan region, and its need for oil to fuel power plants in summer. Improving Kazakh compliance would now be more helpful. But Astana is in a stronger position than Baghdad. Its sovereign wealth fund, Samruk-Kazyna, holds $81 billion of assets, equivalent to about 30 per cent of gross domestic product. Government debt is not high, fiscal and current account deficits are moderate. Oil provides less than a third of government revenue. Income is buoyed by Kazakhstan’s strong mining sector for gold and uranium, both metals enjoying high prices. And its higher oil production probably more than compensates it for lower prices. Kazakhstan’s primary reason for overshooting is the expansion of Tengiz, its main producing field. Production from the even larger Kashagan field is also set to grow, as is third-placed Karachaganak. All these fields, which yield 70 per cent of Kazakh output, have leading international partners, who make the decisions on output, as do other ventures with Chinese companies. Kazakhstan says older fields cannot easily be cut back without risking permanent losses. These factors limit its ability to comply with Opec+ quotas. Of course, one might ask why, knowing all this, Astana then signed up to the “voluntary” cuts. It could use government powers to override the various consortia’s production decisions. But recently-appointed Energy Minister Erlan Akkenzhenov told Reuters, “We will act in accordance with national interests with all the ensuing consequences.” So, Kazakhstan looks neither keen to fall into line, nor under particular economic pressure to do so swiftly. Maybe some Russian arm-twisting might help, as last month, when exports from its pipeline to the Black Sea were briefly interrupted by a Russian regulator’s order. Otherwise, a deal on higher production levels could be sought, but that may just open the floodgates for other Opec+ members with significant unused capacity to demand increases too. So, if pressuring these two colleagues will not achieve major results, what is the goal of Opec+ in its big target increases? The group may not be deliberately targeting US oil output. But American shale will be an unavoidable victim of lower oil prices, particularly when compounded by higher costs due to tariffs. Diamondback, one of the biggest operators in the Permian Basin, said “it is likely that US onshore oil production has peaked and will begin to decline this quarter”. The IEA had predicted US growth at 490,000 bpd this year, so an overall decline would shift market balances significantly – more than bringing all Opec+ members into perfect compliance. Pressuring erring colleagues is a more openly-discussed goal, and a useful side effect. The real pain of the Opec+ boost will be felt not in Astana or Baghdad, but in Houston.