In their efforts to support the global oil market, OPEC+ is pushing member countries to compensate for cheating on supply quotas. However, there are few signs that they are changing.

OPEC+ members Iraq and Kazakhstan are cutting crude oil production to defend prices. These two countries have pledged additional cuts to make up for the initial shortfalls, but the latest production estimates show they haven't even started yet.

Internal OPEC+ documents show that member countries had a poor record of compensating for oversupply during the early rounds of cuts in 2021.

These failures represent a headwind for crude oil prices, with London crude oil prices rising to a two-month high of nearly $87 per barrel. Excess production may relieve consumers, but if it suppresses prices, it threatens the important income of OPEC oil-producing countries led by Saudi Arabia.

Standard Chartered Bank said that cutting production is an important part of OPEC's global strategy. On June 2, Saudi Energy Minister Abdulaziz bin Salman told reporters after the latest OPEC+ meeting: "We need it and we need it badly."

Since its launch in mid-2020, the compensation mechanism for excess production by OPEC+ has been rarely adhered to. OPEC's data for 2021 showed that Iraq's overdue restrictions remained almost unchanged that year, and Gabon's additional supply was so large that it had to be shut down completely for two months to offset it.

The deadline for these countries to complete their quota reductions has been extended several times. By October 2021, over a year after the launch of the compensation mechanism, the additional production cut quotas overstocked by Iraq and Kazakhstan not only did not decrease but increased, even though the increase in OPEC+ quotas should have made it easier for them to cut excess production.

There are several examples of countries compensating for oversupply. The most notable is the United Arab Emirates, which quickly offset excess production in the fall of 2020 after being publicly criticized by Saudi Arabia. However, this situation is rare and the group's past performance has cast doubt on its current pay cuts.

Tamas Varga, an analyst at brokerage firm PVM Oil Associates Ltd., said: "Definitive evidence is needed to convince the market that adjustments have been made." Traders' view is "seeing is believing".

The latest round of negotiations got off to a bad start. Iraq and Kazakhstan pledged in May to comply with their respective production limits and to cut their monthly output significantly below the prescribed levels to make up for excess production since the beginning of the year. However, so far, neither of these countries has reached the initial quota, let alone started compensating.

According to OPEC's latest monthly report, Iraq's daily production in May was 4.195 million barrels, about 0.195 million barrels higher than the target, and Kazakhstan's daily production exceeded 0.043 million barrels, reaching 1.511 million barrels. The data shows that Iraq continued to overproduce at similar levels in June.

The dissatisfaction of OPEC+ members Iraq and Kazakhstan with quotas has long been around. Iraq is seeking revenue to rebuild its war-torn economy, while Kazakhstan is eager to monetize new production potential, such as the $48.5 billion Tengiz oil field project led by Chevron.

On June 12, Iraq's oil department issued a statement reaffirming its commitment to cut compensation and Kazakhstan's energy department promised to make up for its excess production in the next month.

Russia, which co-leads OPEC+ with Saudi Arabia, has pledged to provide compensation but has not yet announced the additional reduction schedule it was supposed to submit to the organization last month. OPEC's data shows that Russia's May production was significantly controlled at 9.182 million barrels per day, but still 0.133 million barrels per day higher than the regular quota. The data comes from a range of external sources. Moscow's own data shows a different, higher level.

Even without implementing compensation restrictions, the overall principle may still be useful for OPEC+.

After introducing the compensation system in mid-2020, countries such as Iraq and Nigeria have shown better discipline in adhering to their initial quotas, even if they did not carry out additional cuts.

Paul Horsnell, head of commodity research at Standard Chartered Bank, said that if compensation arrangements are transparent, it would make "oversupply - though not impossible - increasingly embarrassing diplomatically".

At the June meeting, OPEC+ outlined a supply management plan through the end of 2025 and agreed to extend the compensation deadline to the third quarter of that year. The organization has not yet released details, but the longer timetable may divide the additional production cuts into smaller parts, making it easier for member countries to manage, albeit less obvious to the wider oil market.

If the defaulting countries are not willing to further cut production, they may at least reduce the magnitude of the cuts if OPEC+ proceeds to restore some supply as planned in the fourth quarter.