Saudi Arabia and OPEC face challenges enforcing crude oil output cut quotas

Saudi Arabia, the de-facto leader of the Organization of the Petroleum Exporting Countries, is once again faced with a familiar foe in the form of non-compliance with oil output cuts as the Kingdom tries to navigate its way around a period of poor global demand and lower prices.

On Friday, CNBC reported that OPEC has tightened its focus on the conformity of its members with their output cut quotas.

This comes at a time when reports and data have shown that Iraq and Kazakhstan have often overproduced crude oil above their respective pledges.

Additionally, Russia, OPEC's key non-member ally, has also overproduced at certain times, according to the CNBC report.

Non-conformity a longstanding challenge

The non-conformity with output cut quotas has been a matter of concern for the cartel as it not only makes more oil available to the market at a time of poor global demand but also questions OPEC's ability to influence the market.

Oil prices have remained subdued, and Brent crude on the Intercontinental Exchange has been hovering around $70-$72 per barrel over the last few weeks, sharply lower than this year's peak of $92 a barrel hit in April.

The cartel has been cutting crude oil production by a hefty 5.86 million barrels per day since late last year.

Out of this, 2.2 million barrels per day of crude oil is being cut voluntarily by eight members of the OPEC+ alliance.

Saudi Arabia makes up for the bulk of this with a voluntary cut of 1 million barrels per day, followed by Russia and the others.

Voluntary cuts to expire in September

The 2.2 million barrels per day voluntary cuts were set to expire at the end of September.

However, the cartel earlier in September agreed to extend this for another two months as oil prices continued to fall due to worries over poor demand.

Moreover, Saudi Arabia is reportedly prepared for a low-oil price environment and has abandoned its unofficial target of $100 per barrel crude oil price in favour of increasing production from December.

Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report:

Iraq, Kazakhstan overproduce

According to Commerzbank’s research, both Iraq and Kazakhstan, key members of the OPEC+ group, have failed to implement their respective output cut quotas during January-August.

“Iraqi production is of particular interest, as the country has been producing well above its target despite explicit compensation plans,” Lambrecht said in the Commerzbank report. 

Commerzbank believes that Iraq would have to cut oil production by a hefty 300,000 barrels per day to adhere to its output quotas.

The non-conformity with output cut quotas is one of the primary reasons that Saudi Arabia wants to abandon its desire for higher oil prices as the Kingdom braces to turn up the oil taps in December.

Analysts believe that when OPEC+ and Saudi Arabia start to unwind the voluntary production cuts of 2.2 million barrels per day from December, the actual production increase will be much lower.

This is because of overproduction by Iraq and Kazakhstan this year.

The market is likely to face a considerable oversupply if the cartel goes ahead with its plan of unwinding the voluntary output cuts from December.

Oil prices to remain subdued with rising supply

Oil prices fell sharply last week after reports claimed that Saudi Arabia wants to gain back market share by increasing production from December.

The Kingdom’s decision may primarily stem from the non-compliance of other OPEC+ members. 

However, if OPEC and Saudi Arabia unwind their voluntary output cuts from December, oil prices could fall even further.

Brent crude oil prices are currently near their three-year low, while West Texas Intermediate oil has been hovering around $68 per barrel, nearly $20 lower than its 2024 peak of $87 per barrel hit in April. 

Analysts said that oil prices have been muted even with escalations in the Middle East.

“The market has become increasingly numb to the tension in the region given that, after almost a year of conflict, there has still been no impact on oil production,” Warren Patterson, head of commodities strategy at ING Group, said in a note. 

Patterson believes that if Iran was to become more involved in the Israel-Hamas war, this would increase some sort of risk to the oil supply in the region.

However, the market is aware of the fact that OPEC+ is sitting on a large amount of spare production capacity, which could keep prices lower for months to come, especially if the cartel turns on the tap in December.