(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2nkjmTj
* Chart 2: tmsnrt.rs/2neujUN
* Chart 3: tmsnrt.rs/2neEhWo
By John Kemp
LONDON, March 24 No evidence has emerged of
cheating on the OPEC/non-OPEC production agreement so far. But
Goodhart's Law is a reminder traders should expect countries to
try to circumvent any target once it has been chosen.
Goodhart's Law states that any observed statistical
regularity will tend to collapse once pressure is placed upon it
for control purposes ("Monetary Theory and Practice", Goodhart,
Charles Goodhart was a Bank of England official and he was
expressing the bank's frustration that any measure of the money
supply it started targeting ceased to be a good target soon
after it was chosen.
Anthropologist Marilyn Strathern subsequently reformulated
the law as a more general problem of measurement and
accountability in any organisation or system.
"When a measure becomes a target, it ceases to be a good
measure," she wrote ("Improving ratings: audit in the British
university system", Strathern, 1997).
Central bankers have long known that once a target is
chosen, banks and other institutions have a strong incentive to
innovate around it to escape from control.
The question is whether OPEC and non-OPEC countries will
fall victim to the same problem with their agreement to reduce
oil output now they have settled on a measure to assess
The Organization of the Petroleum Exporting Countries
publishes two figures for its members' oil production in its
"Monthly Oil Market Report".
The first is based on direct communications from member
countries while the second is based on a survey of six secondary
sources, mostly statistical agencies and specialist oil industry
The secondary sources are Platts and Argus, the U.S. Energy
Information Administration, the International Energy Agency,
Cambridge Energy Research Associates, and Petroleum Intelligence
The use of secondary sources dates from disputes in the
1980s about whether members were submitting inaccurate data to
cheat on their output allocations (Goodhart's Law in operation
So the OPEC agreement reached towards the end of 2016 relies
on secondary sources rather than direct communications to set
both the production level and assess compliance with the target.
The use of secondary sources was a key demand from Saudi
Arabia to ensure the agreement was transparent, credible and
But the selection of the secondary sources as the control
target has put the system under scrutiny and pressure as never
Before the agreement was reached, Iraq in particular devoted
a lot of effort to lobbying the secondary sources to raise their
estimates of its output and bring them into line with government
The apparent aim was to establish a higher production
baseline from which any subsequent cuts would be calculated.
Iraq started to share detailed field-by-field production
data with the secondary sources and other media organisations in
an effort to bring their estimates closer to government numbers.
Now the agreement is in operation, the question is how
accurately the secondary sources are capturing OPEC members'
Secondary source estimates have become the focus of intense
interest as OPEC officials have sought to focus oil traders'
attention on compliance.
In general, the secondary sources show aggregate compliance
has been high, with Saudi Arabia shouldering more than its fair
share to make up from weaker compliance by other members.
But in an ironic twist, confusion has arisen about the Saudi
numbers, where have been unusually large discrepancies between
government production data and secondary source estimates for
January and February.
Secondary sources and government production data (notified
to OPEC and the Joint Organisations Data Initiative) usually
track each other closely in the case of Saudi Arabia (tmsnrt.rs/2nkjmTj).
Secondary source estimates are normally a little lower than
government production data, but the gap averaged just 72,000 bpd
in 2016 and was never greater than 102,000 bpd.
But in January 2017, the secondary source estimate was
117,000 bpd higher than the government data, for the first time
in more than a year (tmsnrt.rs/2neujUN).
Then in February, the difference swung the other way, with
the secondary source estimate 214,000 bpd lower than the
government figure notified to OPEC.
The discrepancy caused significant comment in the oil market
and the Saudi energy ministry responded by issuing a rare
statement on March 14:
"The difference between what the market observes as
production, and the actual supply levels in any given month, is
due to operational factors that are influenced by storage
adjustments and other month to month variables."
NEW FOCUS ON SUPPLY
Saudi sources have told Reuters that operational issues
regularly require the addition of withdrawal of oil from storage
("Saudi pledges stable oil supply as market confused by data",
Reuters, March 23).
Saudi Arabia wants traders to focus on the amount of oil
supplied to the market rather than the physical amount pumped
from oil wells in any given month.
The difference between production and supply is caused by
flows into and out from the country's storage tanks.
Sources have told Reuters that production could fluctuate
slightly from month to month, but supply to the market will
remain stable at around 10 million bpd, in line with commitments
"What we are watching closely is the supply. Saudi Arabia
will not supply the market more than 10 million bpd," a
Saudi-based industry source told Reuters.
Pumped production is the basis of the government's direct
communication to OPEC, but the supply figure is usually leaked
to journalists and tends to form the basis of the secondary
The OPEC agreement specifically referenced production, but
Saudi officials insist supply gives a fuller picture of the
amount of oil reaching the market and is what traders should
TRUST BUT VERIFY
Saudi officials are keen to reassure the market they are
committed and determined to reduce supply and bring global oil
stockpiles back to more normal levels.
The discrepancy between production and supply figures in
January and February may be related to an attempt to stabilise
domestic crude stockpiles after an unusually large draw down
over the past year.
Saudi domestic crude stocks have fallen from a peak of 329
million barrels in October 2015 to just 262 million barrels at
the end of January 2017, according to government data (tmsnrt.rs/2neEhWo).
Stocks fell in 13 out of the last 14 months, with an
unusually large draw down in January alone of almost 11 million
barrels. Stockpile depletion cannot continue at this rate
Saudi Arabia remains one of the most transparent producers
in OPEC but there's much less clarity about output from some of
the other parties to the agreement. For other OPEC countries,
the market must rely on secondary source estimates and for
non-OPEC countries, production numbers are self-reported.
(Editing by David Evans)