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By Javier Blas
OPEC+ officials love to make Hollywood film references. Need to bash renewable energy? Gone With the Wind. Attack whoever forecast a peak in oil demand? La La Land. Put oil speculators on notice? “Make my day,” the one-liner from Dirty Harry.
On that very same popular culture vibe, the cinematic reference I think neatly describes the biggest ill afflicting the group now is a movie called The Cheating Game.
Since the beginning of the year, the OPEC+ countries that are subject to output caps have pumped together more than 600,000 barrels a day above their self-imposed limits. The overproduction, as OPEC+ calls it (or cheating, as I prefer), last month reached nearly 850,000 barrels a day, about the same as Venezuela’s output.
The deluge is a key reason why oil prices have fallen so much over the last two months — down 20 per cent over the last year to $75 a barrel — and why many in the energy market are increasingly skeptical the cartel can push prices higher in 2025. The group likes to blame everyone else for its problems. Typical scapegoats include the news media, Wall Street analysts and speculators. But cheating is an own goal.
The larger problem is one of trust, which is exactly what The Cheating Game is all about. If most OPEC+ members ignore what’s expected from them and do so increasingly and repeatedly, the temptation to cheat only grows. The more OPEC+ says it's going to end cheating but doesn’t, the bigger the problem. Ultimately, the oil market will assume that this becomes standard practice.
Credit: Bloomberg
It isn’t that some inside OPEC+ aren’t aware of the challenge. Saudi Energy Minister Prince Abdulaziz bin Salman has made increasing compliance with the output quotas a personal priority, including creating the so-called “compensation” mechanism. Under that tool, the strayers must offset their overproduction over time.
On paper, it’s a great mechanism. In the past, cheating was always forgiven, so long as the sinners made promises of future compliance. Now they not only need to make the same pledges, but also do penance by lowering production to offset past misbehavior. The problem? The cheaters not only continue to cheat on their original quotas but also on the compensation quotas. Cheating on the anti-cheating.
OPEC Secretary-General Haitham Al-Ghais recently traveled to Iraq and Kazakhstan, two of the top dodgers, to discuss the “timely implementation of production adjustments, including the compensation plans.” In a press release last month, OPEC called the trips “successful.” I’m a bit more circumspect. The market has heard it all before, and so far, there’s little sign that either Baghdad or Astana is seriously reducing oil output. Yet Saudi Arabia is applying diplomatic pressure like never before, so there’s a chance that this time is different.
Maybe.
Both Iraq and Kazakhstan rely on foreign investors to boost production, and both have plans to expand capacity. Cheating is the only way to remain inside OPEC+ while at the same time rewarding foreign investors.
Russia, also a repeat cheater, faces its own penance. As with the previous two output cuts, I don’t expect Moscow to implement the reductions the compensation mechanism mandates.
The biggest problem, however, lies elsewhere: the United Arab Emirates. It is, so to speak, the oil barrel in the room: no one speaks about it, but everyone thinks of it. Officially, the UAE isn’t breaching the rules. Abu Dhabi claims it pumps just 2.9 million barrels a day, exactly as it should. OPEC, which tracks member production by following several external data providers, puts UAE output at about 2.9 million barrels a day. Everyone else, though, has a higher number — in some cases, much higher.
The International Energy Agency puts Emirati oil production at 3.3 million barrels a day. Ask oil traders, who keep close tabs on tankers coming and leaving the UAE, and you’ll likely hear even higher numbers. It’s common to hear estimates of about 3.5 million barrels a day. If true — and independent tanker tracking data suggest the traders are right — that would make the UAE the biggest cheater.
Why is OPEC turning a blind eye to Abu Dhabi? Politics. The cartel is striking a balance between allowing the UAE to profit from the billions of dollars it has spent in new production facilities and keeping the global oil market stable.
In 2021, Saudi Arabia risked a major rift inside the group when it publicly admonished the UAE for cheating. The problem was solved in two steps. First, Abu Dhabi briefly reduced its output. Second, a few months later, OPEC removed the IEA from the data providers it uses to calculate compliance. What can’t be seen must not be real — or so the cartel thought. The difficulty, of course, remains. Every oil trader knows about the overproduction. Allow me a final cinema reference: Don’t Look Up.