Ecuador straining relations with the OPEC
Ecuador has publicly stated that it will not adhere to OPEC’s (Organization of the Petroleum Exporting Countries) production curbs. The steep slide in oil (OIL) (USO) prices since mid-2014 led OPEC members, in November 2016, to sign a pact to curb oil production by 1.2 million barrels a day starting January 1, 2017. In December, non-OPEC members such as Saudi Arabia (KSA) and Russia (RSX) had also agreed to reduce output by 558,000 barrels a day to help address price slide triggered by the supply glut. Accordingly, OPEC oil production had dropped by 32.5 million barrels a day from January 1st, lending some respite to the steep fall in oil prices since mid-2014.
The price of crude oil has now recovered nearly 50% since its lowest point seen in January 2016.
Need to plug the economy’s fiscal deficit
Ecuador’s decision is backed by the country’s need to plug its fiscal deficit. According to Ecuador’s oil minister, Carlos Perez, “we are not meeting the quota imposed on us because of the obvious needs the country has……… there’s a need for funds for the fiscal treasury, hence we’ve taken the decision to gradually increase output.” The Latin American (ILF) (GML) economy’s compliance on its agreed quota of 26,000 barrels a day cut in oil production was seen falling to 69% in June. Accordingly, the country has been falling short by about 10,000 barrels a day.
According to Perez, Ecuador remains committed to the pact and its support towards the Organization. However, as per a non-written agreement with OPEC on flexibility in terms of production needs, the economy could now be curbing production by approximately 16,000 barrels of oil per day.
June 2017 has already seen OPEC production up by 1.2% vis-à-vis May. Output for OPEC averaged 32.61 million barrels a day last month, with Ecuador contributing 1.75% of it. Besides, countries such as Libya and Nigeria, which are exempted from the output-cut agreement on account of social instability, have been pumping in more oil.
Ecuador’s decision raises the fear of a contagion
Markets fear the risk of a contagion to other OPEC economies. Ecuador’s move could encourage other OPEC nations such as Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Qatar (QAT), UAE (UAE), and Venezuela to rethink their commitment to the production curb. Other OPEC members following suit could impact the recovery in oil prices achieved since last year. Kazakhstan’s intended ‘soft exit’ from the deal be taken as a hint.