(Bloomberg) — The Saudi royal running the kingdom’s oil policy is achieving something his predecessor never did: bringing the quota cheats of OPEC+ to heel.
Prince Abdulaziz bin Salman has done this through an unusual method. The cartel has instructed members who failed to deliver their agreed share of oil-production cuts — like Iraq and Nigeria — to promise extra reductions in compensation.
These punishments pose an unrealistically onerous burden for economies that have been laid low by the oil slump. Sure enough, the countries concerned aren’t complying with them, and initial compensation cuts pledged for July never happened.
But the strategy is paying off for the Saudis. In July, Iraq and Nigeria both achieved 85% of their targeted reductions, according to OPEC+ data, levels of compliance they’ve almost never displayed before.
That’s a sharp contrast with last year, when Baghdad disregarded its OPEC+ quota entirely, increasing supply when it should have cut. The long-running issue is known as the cartel’s “Pinocchio Problem.”
In aggregate, the group implemented 95% of its production cuts last month. Such high compliance has been achieved in the past, but only because a few members — frequently Saudi Arabia — curbed output far more than required.
In July, the cartel’s success didn’t depend on the kingdom pumping way below its target.
The Organization of Petroleum Exporting Countries and its partners have been making vast output cuts this year — about 10% of global supply — to offset the loss in demand from the coronavirus crisis. They’ve helped to triple prices in four months, and much of that success has been down to the discipline instilled by Saudi Arabia.
When Prince Abdulaziz was appointed as the kingdom’s energy minister last year, analysts predicted his decades of petroleum diplomacy would prove an asset in OPEC negotiations. His crack-down on quota-busting suggests they were right.
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