Oil: What can we learn from the last OPEC+ meeting?

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07/05/2019 | 02:57 pm
The level of oil prices remains largely linked to geopolitical interactions between producing countries, whether or not they are members of OPEC, and the rest of the world. As such, the American sanctions against Iran, or Venezuela's economic decline, perfectly reflect this economic reality. This growing politicization of oil markets gives a leading role to the Organization of Petroleum Producing Countries, which no longer has the role of regulator on its own. The cartel joins other producing countries, including Russia, which plays a central role in this broader alliance called OPEC+. Arguably, Moscow dominated the last OPEC+ summit, attesting to Russia's supremacy within the cartel policy.
A reminder in general terms:

- The extended alliance extends production quotas until March 31, 2020, an extension of 9 months.
- Production restrictions remain unchanged at 1.2 mbpd.
- A "Cooperation Charter" has been signed to strengthen OPEC's cooperation with other producing countries, led by Russia.
- The next cartel meeting will be held on December 6, 2019.

About the Organization of Petroleum Exporting Countries

Created in 1960 at the Baghdad conference, OPEC's first missions (formed by 5 countries: Saudi Arabia, Iran, Iraq, Kuwait and Venezuela) were limited to better controlling the oil revenues collected by its members. As early as the following decades, the waves of nationalization of the oil industry, coupled with an increase in the number of members and greater volatility in oil prices, quickly gave the cartel a leading role.

Today, the Intergovernmental Institution based in Vienna has 14 members. In addition to the founding members, OPEC therefore includes Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, Congo, and the United Arab Emirates.


A role of swing producer...

With a cumulative production of around 30% of world production, for a control of nearly 70% of world oil reserves, OPEC is the swing producer in the oil markets. In other words, the cartel, with Saudi Arabia at the top of the list, has enough weight to affect the price per barrel by adjusting its production. OPEC's mission is therefore to respond to imbalances between supply and demand in order to guarantee price stability on the one hand and a remunerative price for its members on the other. In the end, the interest remains to limit price volatility, which is both a scourge on the budgetary balances of producing countries and a serious obstacle to investment by the oil sector.

... which is crumbling with the rise of non-conventional hydrocarbons...

If the cartel has been able, with varying degrees of success, to fulfil this task of regulator, the rapid growth of American shale oil seriously undermines its influence. Much more flexible in response to demand thanks to a significantly shorter investment and production cycle, US shale oil producers are gaining market share from OPEC. Proof of this is the fact that the United States is tending to become a net exporter of oil.

Faced with weak demand and the rise in US production, OPEC is losing market share

In response to a logic of energy supremacy, the United States has become the world's leading oil producer, ahead of Russia and Saudi Arabia. Despite profitability problems plaguing the American industry, technological advances, constantly improving the hydraulic fracturing process, have allowed American producers to double their production since 2009, to more than 12 million barrels per day.

This new competition has prompted OPEC to radically revise its strategy. While initially the priority was to defend its market shares in the face of the rise in US production (pushing prices down in 2014 to USD 25 per barrel), the cartel joined forces for the first time with non-members of the organization, including Russia, to halt the fall in prices through the introduction of production quotas.

The role of supplemental producer is therefore no longer fully supported by OPEC. If this is an admission of failure for the cartel, which cannot regulate oil markets on its own, it seems obvious that this alliance allows OPEC to safeguard its credibility, or at least what remains of it. As such, the last summit of OPEC and its allies, grouped under the name OPEC+, marks the death of OPEC as a regulator. Indeed, a "permanent cooperation charter" has been adopted in order to strengthen the coordination of the cartel's actions with its allies, led by Russia. This now officialized rapprochement gives Moscow almost complete supremacy over the Organization's policy.

... and internal conflicts.

In addition, there are internal divisions, which significantly affect the unity of the cartel. Beyond the deep-seated ideological differences that complicate the cohabitation of some members, particularly between Saudi Arabia and Iran, it should be noted that not all member countries have the same resilience to fluctuations in the price per barrel.

More specifically, the degree of dependence on hydrocarbons and average cost prices vary from one country to another. It is difficult in this context to move towards decisions that fully satisfy the 14 members of the cartel. The risks of disagreement are therefore high.

Nevertheless, at the end of the meeting of OPEC and its partners, it must be said that the cartel manages to discipline its members. This is evidenced by the unanimous agreement to extend the voluntary production reductions of 1.2 mbpd until March 31, 2020, a period of 9 months.
Jordan Dufee
MarketScreener.com 2019
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