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Opec starts to ease cuts

The group is seeking to return compliance to 100%, implying a sharp immediate rise in output. But the details are vague

Opec's members are to start raising oil output again, officially aiming to achieve 100% compliance with its cuts and, in doing so, imply the addition of up to 700,000 barrels a day of supply to the market.

It marks the beginning of the end of Opec's cuts strategy that began in January 2017, eliminating a global stock excess than lifted prices by about 50%.

But the decision left many questions unanswered—confusion that was reflected in a 2% rise in Brent prices, to almost $75 a barrel, on news that had been intended to ease them.

The market was expecting more detail. Earlier reports had suggested Opec would agree to increase supply by up to 1m barrels a day. Tehran objected, believing this was a response to US demands for more oil to cover the price impact of sanctions on Iran. Unable to get a unanimous decision, Opec ministers effectively agreed a roll-over of the existing deal, but with the new message of ending over-compliance.

Hence the communiqué following the meeting did not even stipulate a volume of oil supply, only that the group would "strive to adhere to the overall conformity level of Opec-12, down to 100%, as of 1 July 2018" until the Declaration of Cooperation with non-Opec countries expires at the end of 2018.

Nor could Opec say which countries would add supply to the market. "You do the maths," said Suhail Mohamed al-Mazrouei, the UAE's energy minister and current Opec president.

Mazrouei added only that targeting the 100% compliance rate would be a "collective effort" to bring the cuts back down to the agreed target of 1.18m b/d (the cuts in May amounted to 1.86m b/d). "The actual production of each country is something unilaterally they can decide."

In practice, that means Opec countries with spare capacity—chiefly Saudi Arabia and its fellow Gulf producers—will account for the bulk of the production increase at the expense of countries that are losing output. Venezuela's production is now more than 600,000 b/d beneath its quota; Angola's is 140,000 b/d lower than its quota.

It also suggests the supply additions from these core Gulf Opec members could rise in line with further Venezuelan and Iranian output losses. Some analysts expect Venezuelan production to shed at least another 300,000 b/d by year-end. As new US sanctions bite on Iran's oil sector, it could also lose more than 400,000 b/d of output.

The weak communiqué was a victory of sorts for Iran, which had looked increasingly isolated. Ahead of the meeting, its condition for agreeing to the Saudi proposal for a 1m b/d hike was an official statement from Opec condemning US sanctions on member states. This was not granted. So Tehran held firm, sticking to its pledge not to endorse a new deal.

Many details remain unclear. Congo was admitted to Opec membership during the meeting, but without an official new quota. Furthermore, having met its own target to reduce the OECD stock glut back beneath the five-year average, Opec said it would find a new metric to "enhance the analytical depth and understanding of the complex global oil demand and supply dynamics beyond the short-term". It gave no more information.

The 100% compliance target could also be problematic when Opec takes its agreement to Russia and other non-Opec partners at a meeting on 23 June. While Opec producers have been over-complying with quotas—meaning more oil is needed to hit 100%—the non-Opec producers have been under-complying.

So, on paper, full compliance from non-Opec would imply a reduction in supply of 270,000 b/d. But this is implausible. From within the Opec+ group of countries, Russia was the instigator of the change in strategy to start pumping. It is expected to increase production by up to 400,000 b/d by year-end—oil that will arrive on top of Opec's increases.

The other instigator of an end to the cuts, from well outside the Opec+ group, was Donald Trump. His tweet in April castigating Opec for high oil prices changed the narrative and shifted Saudi policy. India and other consumers also applied pressure. They will now wait to see whether and how this Opec plan to increase supply yields the kind of oil-price drops they have been seeking. The market's bullish reaction to the Opec announcement would not have been welcome.

Following the meeting in Vienna, Trump was quick to add his view, tweeting: "Hope Opec will increase output substantially. Need to keep prices down!" Saudi Arabia and Russia seem eager to satisfy. But the outcome may now depend on whether they are willing and able to do enough to soften the impact of Trump's own sanctions.

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