OPEC achieves record compliance with oil output cuts. Experts ask if it can last

Dan Yergin: Border tax provides advantage for WTI
Dan Yergin: Border tax provides advantage for WTI

OPEC has achieved record compliance with planned output cuts in the first month of a deal, according to multiple reports, but uneven contributions from members raise questions about whether the producer group can maintain that level.

The International Energy Agency on Friday reported the OPEC members have cut 90 percent of the supplies they committed in November to take off the market. A Reuters survey put compliance at 92 percent, while S&P Global Platts research showed 91 percent compliance.

The levels are remarkable in light of OPEC's poor compliance record during past efforts to rein in oversupply. However, not all members are carrying their own weight.

As predicted by many energy analysts, top oil exporter Saudi Arabia is already compensating for underperformers. The kingdom's January production was 9.98 million barrels a day, much less than its quota of about 10.06 million.

"How long Saudi Arabia is going to be willing to shoulder the burden of these cuts if it proves that some of their cohorts are not fully complying with the deal, that remains to be seen," Herman Wang, OPEC specialist at S&P Global Platts, told CNBC Europe on Thursday.

Saudi Energy Minister Khalid Al-Falih said last month OPEC would probably not need to extend the cuts beyond the six-month agreement in light of early compliance and fuel demand forecasts.

Kuwait and Angola are also cutting more than required, Platts reported. Algeria and Venezuela slightly exceeded their promised quotas, while Iraq — OPEC's second largest producer — has the most work to do in closing the gap between its quota and current output.

Iraq's January production was 4.48 million barrels a day, about 130,000 barrels a day above its quota, according to Platts. Still, last month's output was down 150,000 barrels a day from December as exports from Iraq's southern terminals declined, Platts noted.

OPEC members 'get A-' for deal compliance so far: Pro
OPEC members 'get A-' for deal compliance so far: Pro

Substantial budget deficits in oil-dependent countries caused by low crude prices are creating an incentive to stay honest, according to Daniel Yergin, vice chairman at consultancy IHS Markit.

"I think the reason that they're sticking to this agreement is necessity and what it means to their own national budgets," he told CNBC's "Squawk Box" on Thursday.

Yergin said what is more striking is the participation of non-OPEC members, including Russia — which has reportedly delivered a third of the 300,000 barrels a day in cuts it promised. Yergin said he expects Russian Oil Minister Alexander Novak to use his appearance at IHS' CERAWeek conference next month to affirm countries are sticking to their quotas.

The latest compliance reports drove oil prices higher for a third day on Friday, countering a rebound in U.S. drilling activity. OPEC's output cuts have stabilized crude prices above $50 a barrel, a level that allows more American producers to pump at a profit.

Despite rising U.S. output, Hannam & Partners oil and gas analyst Alex Holbourn said the Saudis have changed their strategy after declining to cut output at the start of the downturn in 2014 and throughout the following year.

Arguably, oil market has already started to come to balance: Pro
Arguably, oil market has already started to come to balance: Pro

He told CNBC Europe on Friday he believes there is a decent chance OPEC maintains compliance levels at 80 to 100 percent. One caveat, Holbourn noted, is future production from Nigeria and Libya, which were exempt from cutting as they try to restore supplies impacted by internal conflicts.

Libya and Nigeria increased production in January by 50,000 and 210,000 barrels a day, respectively, Platts reported. Iran, also exempt to a certain level, raised output by 30,000 barrels a day. Faster-than-anticipated rebounds in these countries put pressure on other OPEC members to make deeper cuts.

John Kilduff, founding partner of Again Capital, sees more upside from those countries, noting disputes between rival factions controlling Libyan oil facilities are "pretty much settled," and Nigeria has resumed payments to former militants following a wave of attacks on the nation's crude infrastructure.

Kilduff, a long-time oil bear, said he believes the 90 percent compliance findings somewhat misrepresent the situation, given Saudi Arabia's lop-sided contribution.