OPEC is driving itself to irrelevance with farcical aplomb
by Gaurav Sharma, July 2, 2019
It took months of delays but even before the cartel’s latest ministers meeting began in Vienna, the Saudis and Russians rendered it meaningless by largely deciding an outcome that failed to surprise the market…
Not that long ago, a meeting of the Organization of Petroleum Exporting Countries (OPEC) carried great weight in the global energy market and was accompanied by intense anticipation. The powerful oil producer’s cartel at one point held over a third of the international crude market share and its decisions, often resulting in a cut or uptick in members’ production, dictated the direction of oil futures.
But these days it is a changed world, and the latest farce at its Secretariat in Vienna, Austria offers ample proof of that. Buffeted by rising oil production in the United States, once one of its key customers for over 50 years and now the world’s leading producer, the cartel’s demeanour appears to resemble that of a rabbit caught in the headlights.
As incremental American barrels drove the price of oil down, triggering the market slump of 2015-16, OPEC shook hands with Russia, and nine other OPEC producers, back in 2016 to – in its own words – “rebalance the market.”
Fast forward three years, and let alone rebalancing the market, even putting together a ministers’ meeting has become arduous given it has multiple stakeholders to please in the backdrop of Saudi-Iranian tensions and consideration for its new ally Russia.
The latest meeting – its 176th – was due to take place in April but was postponed to June, with Iranian, Russian and Saudi wrangling pushing it forward to finally take place on July 1-2. Then even before the ministers met, Saudi Crown Prince Mohammed Bin Salman and Russian President Vladimir Putin declared at the G20 Summit in Osaka, Japan that they were willing to rollover the OPEC and non-OPEC cuts of 1.2 million bpd by at least another six months, and “preferably” for nine months.
In the end, when the commotion subsided in Vienna at the conclusion of proceedings on July 2, that is exactly what happened. The production cuts were rolled over to March 2020. As far as the market goes, it did not matter anyway with most analysts pricing in precisely such an outcome and not anticipating any significant upside for the front-month oil futures contract.
That is because the strategy largely put in place by Riyadh and Moscow has no viable exit clause. The official reason given for the cuts in 2016 was that the move was all about balancing global oil inventories, and not about supporting the oil price.
Back then OECD’s inventories averaged 3.051 billion barrels in 2016, fell to 2.991 billion and 2.839 billion barrels in 2017 and 2018 respectively, but are projected by the EIA to rise to 2.936 billion barrels in 2019 predicated on a rise in US production.
However, by OPEC’s own admission the cartel is still shy of meeting that objective by 22-25 million barrels. With OPEC members Libya, Iran and Venezuela exempt from the cuts, the remaining 11 members’ cuts have brought headline production down to 30.17 million bpd, going by S&P Global Platt’s latest survey.
Given total global oil demand is just south of 100 million bpd, that gives OPEC a share of less than 30% for the first time in nearly three decades, when the British and Norwegian sectors of the North Sea were pumping crude at a canter. While OPEC continues to lose market share and pump less, US crude is gleefully replacing it.
According to data published by US Energy Information Administration (EIA), the country produced 12.4 million bpd in May and is well on track to touch or even cap a level of 13 million bpd. Unrestrained by the shackles of production fixes and cartels, more and more US cargoes are heading to Asia not only replacing declining light crude production in Malaysia and Indonesia, but compelling major Asian importers to alter their refining complex from heavier OPEC crudes to lighter US crudes.
Faced with this dynamic, and a challenging global economy beholden to US President Donald Trump’s Twitter account and his penchant for trade wars, OPEC’s response was pretty lacklustre.
Saudi Oil Minister likened US shale production to the rise and peak of the North Sea; quipping that the shale revolution will “fade.” Be that as it may, few expect the decline rates to kick in before five to seven years, and even the International Energy Agency (IEA) disputes that.
In any case, the North Sea analogy was a pretty strange one, given it took the region four decades to peak by 1996-97, and is still going over 20 years later. It is doubtful OPEC can hold its nerve for an extended period of five years, let alone 40.
As for using global inventories levels as a gauge, well that seems to be on its way out too with ministers saying perhaps backdated 2010-2014 averages might be better. No clues were offered about the exit strategy either.
Instead, a “charter” affirming OPEC and non-OPEC relationship was published, only to be immediately derided by the Iranian delegation as “non-binding.” Buttressed by Trump’s sanctions, Iranian Oil Minister Bijan Zanganeh also uttered what is on every analysts’ mind – that “bilateralism and unilateralism” by some risked undermining and imploding OPEC, an apparent dig at Riyadh and Moscow.
Given that OPEC has not published individual members’ quotas for over a decade, apart from the dispatches of data aggregators such as Argus and S&P Global Platt’s, and surveys by newswires such as Reuters, there is little way of “officially” ascertaining who is cutting what.
As usual, the Saudis have and would continue to bear the bulk of the burden, and canny Russia has OPEC right where it wants it. From the market’s standpoint, 10 Russian-led non-OPEC members are already now included in the weighing-up of OPEC’s impact for which no charter was needed.
The Kremlin can single-handedly unravel the agreement to leave OPEC facing severe headwinds, albeit at a cost to itself too but nothing of the magnitude of what the cartel’s members would face. In any case, Russia’s cuts – quite like many OPEC members – are not all that in sync with its pledges, with likes of Iraq, the United Arab Emirates and others doing the same at various points since 2016 to date.
On the face of it, since OPEC does not appear to have any alternative plans, sooner rather than later, the cartel will have to acknowledge the fact that it is stuck in a production cycle that it cannot extricate itself from. While the realisation of that has probably sunk in – the dilemma of either protecting its market share or supporting the oil price has yet to be confronted amid rising anxieties about its own relevance and no visible upside for the $60-70 per barrel Brent oil price range on the near horizon.