Kazakhstan production is turning into a point of friction with OPEC+

Kazakhstan has been one of OPEC+’s “rogue” members, regularly producing more oil than it was supposed to under the bloc’s production cap agreement. Now, it appears that Kazakhstan has done it again, potentially heightening internal tensions within OPEC+.

Reuters reported this week that Kazakhstan’s largest field, Tengiz, has reached record production levels since the beginning of the month. The publication cited anonymous sources for the information, which put Tengiz’s total at 699,999 barrels per day.

The report followed another report a week ago, which again cited unnamed sources as saying that Kazakhstan’s September total was a 10 percent increase from August’s average, once again exceeding the OPEC+ country’s quota — all after Kazakhstan submitted a plan to compensate for its production violations to the OPEC secretariat in July.

At the time, Kazakhstan admitted that it overproduced by 620,000 barrels per day, which, while not as large as Iraq’s 1.1 million additional supplies, was still a fairly significant figure that did not particularly happy OPEC+ colleagues in Kazakhstan. The excess was to be fully offset by further cuts by September next year. However, judging by the way things are going now, if those Reuters reports are correct, the compensation fails. And oil prices are stuck. It could be worse.

Related: Iran seeks higher prices for its crude destined for China

In late September, the Financial Times reported, citing even more anonymous sources, that Saudi Arabia was ready to give up tracking unofficial oil prices of $100 a barrel of Brent. The move would have been a warning shot before the kingdom began to bring back oil production. The FT’s sources said it would happen on December 1. If it does, the price of oil will fall—and all of OPEC would lose money.

This is what made it so difficult for OPEC and later OPEC+ to make production cuts work. Some members, like Iraq and apparently Kazakhstan, are more interested in their current market share and exporting as much as they can. Others, such as the Saudis, are, or at least were, more concerned with long-term prices, hence the effort to support them, even at the expense of market share.

However, if other members continue to overproduce – including OPEC+’s most important ally, Russia – it makes little sense to continue to bear most of the burden of lower production and lost market share, which would Saudi Arabia’s reported decision to start increasing production perfectly justifiable. This could further intensify internal tensions within OPEC and OPEC+.

On the other hand, the purpose of creating the OPEC+ bloc was primarily to accumulate more pricing power on the global crude oil stage by manipulating the balance between supply and demand. If that bloc breaks up, pricing power would fall with it and it would be all against all – a prospect not desired by any OPEC producer. This should be especially true in the age of algorithmic trading, which often ignores oil fundamentals in favor of other factors such as China’s economy or geopolitics. It seems, however, that some lessons have to be learned the hard way.

Kazakhstan’s oil output in October is likely to be within its quota, sources told Reuters. The Kashagan field will be on maintenance, meaning a 400,000 bpd drop in Kazakhstan’s total, bringing the country in line with OPEC expectations. However, maintenance will end by December and Kazakhstan will have to decide what is more important: market share or continued OPEC+ collaboration. He is not the only one who has to make this decision. The Saudi barrels are coming, and prices are about to drop – barring a major production disruption, of course.

By Irina Slav for Oilprice.com

More top reads from Oilprice.com