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Earlier this week, Ecuador's Oil Minister Carlos Perez announced that the country would no longer abide by its commitment to the Vienna Accord.
That's the OPEC-Russia deal to cut oil production and boost prices.
Now, pundits have been quick to misinterpret that as the first splintering of OPEC on its oil price regimen.
Actually, it may indicate far less than meets the eye.
Now, the Vienna Accord took effect in January.
Despite some questions about the equation between production on the one hand and exports on the other, that agreement had held. It initially supported higher prices.
However, that scenario has more recently come under some pressure from the stubborn rise in production in the United States (not a party to the OPEC/non-OPEC deal).
In the aggregate, OPEC remained faithful to the commitment with the association at or above the 100% compliance level until June. After that, there had been some retrenchment amid signs the agreement might be experiencing some pushback.
Some of this has been the frustrating recent decline in prices as OPEC exports as a whole began to increase – and American production rose even higher.
And then there was the signal from Saudi Arabia that the basis for the accord may be wearing thin. Riyadh telegraphed both a rise in production and in exports.
Still, no OPEC member officially indicated it would not abide by its part of the cuts… until Monday. Ecuador became the first.
Ecuador's Oil Production Is in China's Hands Anyway
Now to put this in perspective, as one of the smallest OPEC producers, Ecuador had been contributing less than 17,000 barrels a day to the effort.
And then there's the reality behind the cash-strapped nation's situation.
As I discussed in Oil & Energy Investor a few years ago, heavy Chinese loans to both the central government and national oil company Petroecuador resulted in the country becoming the first OPEC member to lose control over its own crude oil exports.
Instead, oil revenue was now under the control of Beijing as repayment for the debt incurred.
The situation facing Ecuador had telegraphed what could be the future for both Brazil and Peru, where Chinese funds had also been advanced. It also demonstrated that the lending policy had morphed.
Initially, the loans had resulted in exports of oil back to mainland China. Now, the target end user of the oil was less important to Beijing than the control over revenue.
But Ecuador's defection has introduced the prospect of a broader unraveling of the entire Vienna Accord.
In his defense, Perez had noted that his country has some flexibility in addressing its OPEC production quota. While never made public (these sidebar concessions rarely are), my sources confirm the arrangement exists.
But to see whether Ecuador's "defection" – with an out or not – will result in the rest of the signatories of the Vienna Accord will fall like dominoes, we need to look at this from a different perspective…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.