Editor's Note: Below is an excerpt from a research note written by our Energy Policy analyst Joe McMonigle.
OPEC’s Joint Ministerial Monitoring Committee (JMMC) met Friday in Jedda, Saudi Arabia to review compliance of the organization’s production cut deal with other non-OPEC producers. The OPEC panel took a victory lap as global crude stocks begin to enter OPEC’s target of the five-year average range next month but don’t look for OPEC to apply the brakes on production cuts in 2018.
The mandate for the meeting is to review compliance, and we agree the plan is working as designed. Compliance is strong and fundamentals will further point to a balanced market in the 2H 2018. But Venezuela is making it easier for OPEC to achieve their goal and helping to accelerate the drawdown in global supplies. OPEC should consider giving a “Man of the Year” award to Venezuela President Nicholas Maduro as the country’s production is down by 800,000 barrels per day (b/d) from 2016. Venezuela production in March was 1.49 million b/d but its allowable production under the OPEC agreement is 1.975 million b/d. Venezuela continues to lose production by about 50,000 b/d each month and we expect production to fall another 500,000 b/d this year.
The JMMC is not charged with making recommendations about future policy on the production cut deal as that discussion will begin in earnest at OPEC’s full ministerial meeting in mid-June. But the theme in comments from ministers point to keeping the cuts in place even after crude stocks hit the five-year average goal. You may ask why continue the cuts if the overhang in crude stocks has been reduced to OPEC’s target and OPEC’s response is concern about continued uncertainty about demand.
As we said in our February note “Report from Riyadh”, the Saudi minister said OPEC will err on the “safe side” explaining that he would rather cut too much instead of too little. We think a 3-month extension in 2019 is a good probability but it’s still early to make decisions about post-2018. OPEC will have time to review market conditions and make a decision on the exit plan at its meeting in November.