Oil Cut Deal Can Work, But “We Tend to Cheat”

OPEC’s agreement to cut production for the first time in eight years has the potential to balance the oil market, as long as everyone sticks to it, former Saudi Arabia oil minister Ali al-Naimi said.

"The only tool they have is to constrain production," al-Naimi said of OPEC at an event in Washington, D.C. "The unfortunate part is we tend to cheat," Bloomberg reported.

OPEC on Wednesday agreed to cut production by 1.2 million barrels a day, while Russia and other oil producers committed to reducing their own output by another 600,000. 

The deal spearheaded by Saudi Arabian Energy Minister Khalid Al-Falih represents a departure from the pump-at-will policy promoted by al-Naimi when he was oil minister. OPEC adopted that policy in 2014.

Remarking on his approach, al-Naimi said he was not opposed to production cuts in 2014, as long as everyone participated. 

"They wouldn’t … There’s not much you can do if there is no maximum cooperation between the producers."

He also expressed skepticism that Russia, considered a wildcard during talks, would follow through on its promise to reduce output. "Will Russia cut 300,000? I don’t know. In the past, they didn’t."

Saudi Arabia still has production potential, according to al-Naimi. 

During a panel discussion with Hess Corp. Chief Executive Officer John Hess and former Schlumberger Ltd. CEO Andrew Gould, al-Naimi said his country has untapped shale oil and gas reserves, and advancing technologies would only bring shale production costs lower.

The size of the cut is fairly trivial in a 96-million-barrel-a-day marketplace that remains oversupplied. Should prices rise in the next few weeks, American shale producers are also very likely to drill and complete more wells, which would add supply to the global market.

The size of the cut is fairly trivial in a 96-million-barrel-a-day marketplace that remains oversupplied. Should prices rise in the next few weeks, American shale producers are very likely to drill and complete more wells, which would add supply to the global market. 

Analysts suggest that if history is any guide, even a modest agreement can be breached by cheating.