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Abu Dhabi, UAESunday 16 December 2018

Non-Opec producers may exit a global oil cut deal early

Opec is likely to acquiesce to Russia's demands to be the first to leave the pact

Geopolitical risks may cause oil to reach $80 according to Citigroup. Carlos Jasso / Reuters
Geopolitical risks may cause oil to reach $80 according to Citigroup. Carlos Jasso / Reuters

Vandana Hari, founder and chief executive of advisory firm Vanda Insights, talks about prospects for Opec and a group led by Russia for an early exit from a global oil cut agreement in place until the end of this year.

QCan Opec keep up the excellent compliance they’ve had so far through to 2018?

AI expect Opec’s overall compliance with its cuts will remain high through 2018. Even if a few members continue to overproduce, the Saudis will likely continue to play a balancing role as they have been doing so far. Venezuela will effectively be cutting more than it needs to as well, as ­PDVSA’s growing financial stress hobbles its oil production.

How are Opec and non-Opec likely to frame an exit strategy in June?

Opec’s exit strategy could involve a gradual relaxation of the cuts, as returning 1.8 million barrels a day to the market in one go might swing it to an oversupply again. The strategy might involve letting the non-Opec producers off the hook first – I think that’s the message coming from Russia.

Geopolitics and unforeseen events aside, would there be any need for continued production cuts through 2019?

It does look like Opec’s goal of reducing OECD oil inventories to five-year average levels could be achieved in 2018. That would set the stage for easing up of the production restraints from 2019.

Is there any likelihood of reaching out to shale producers, as Opec secretary general Mohammed Barkindo indicated a few times, to stabilise prices?

It is impossible for US shale producers to participate in any coordinated production cuts. They are truly independent, operate in a free market, and follow their market economics. While Opec publicly urging them to rein in output may make for good PR, that request will always fall on deaf ears. However, the shale producers are heeding their shareholders and embracing greater fiscal discipline. Several major producers have recently vowed to prioritise profits over a growth-at-all-cost model, which may change the trajectory of US output growth.

Can we expect continued compliance from Russia in 2018?

I feel Russia will continue to honour its commitment under the production cut agreement, but might make a strong case to be the first one to leave.