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Controversy Swirls at OPEC Discussions, but It Really Has Only One Option...
Photo: JOE KLAMAR/AFP/Getty Images
Following yesterday’s technical meetings, the Organization of the Petroleum Exporting Countries’ (OPEC) Joint Ministerial Monitoring Committee is meeting today in Vienna in advance of Friday’s convening of the OPEC-plus alliance. The outcome of the sessions will determine the group’s oil market strategy for the coming year. And while the current freeze agreement that has governed OPEC output for the past two years remains in effect, additional factors—both immediate and longer term—continue to complicate the group’s forecasts and planning. The stability and intended higher prices sought by the group when the oil supply cuts were first proposed have largely failed to deliver on either of those objectives (though admittedly the cuts have kept prices above where they otherwise would have been).
That said, a number of factors have conspired to undermine the OPEC strategy, not the least of which can be traced to both the variability in oil demand as well as the robust supply coming out of non-OPEC sources, especially the United States. Sanctions, political upheaval, economic growth, and trade wars have also impacted both supply and demand. Market positioning has only added to the short-term volatility.
As OPEC convenes, additional uncertainties abound. Renewed hopes that the United States and China would strike a trade agreement along with positive stock draw data (as refineries come out of turnaround season) and reports of key OPEC members advocating for additional supply cuts (over and above the current 1.2 million barrels per day reduction) lifted (Brent) oil prices to over $63 per barrel. Market optimism was also buoyed by difficult or deteriorating conditions in places like Libya and Venezuela, Iraq and even Iran (exempt from the cutback but still under sanctions).
Further complicating matters, certain Russian companies have suggested that they’d like condensates excluded from their (voluntary) quota target. Saudi energy minister Prince Abdulaziz bin Salman has aggressively called on member countries to step up their supply cut compliance as a way to tighten global supplies and even suggested the kingdom might be willing to extend its over-compliance to further incentivize the group’s actions. At the same time, he also cautioned that Saudi Arabia was no longer willing to compensate for other’s non-compliance. Yet Saudi Arabia can ill afford to see prices plummet on the day they set the price for Aramco’s valuation.
Among the most obvious compliance laggards are Iraq, Nigeria, AND Russia. And while Iraq had recently committed to reduce production to achieve compliance, Prime Minister Mahdi’s resignation and the ongoing protests and political crisis may put that commitment in jeopardy. In the past two years, Nigeria has actually increased its output. Russia’s role and commitment to the OPEC plus alliance has been optically important, but their compliance with cutbacks has been intermittent and lackluster at best.
Also on the agenda for this week’s discussion is if, how, and when to extend or expand the current agreement. Russia reportedly would like to defer deciding on any extension at least until the current agreement is ready to expire next March. Other members fear that a failure to provide such clarity, especially after the recent rise in prices, would precipitate another price drop both now and into early 2020 when crude demand recedes as refiners move back into maintenance. These members appear to support extensions of between three and nine months, and options of additional cuts of between 400 and 800 thousand barrels per day are reportedly being discussed—although the timing and composition of such additional cuts would need to be meaningful to satisfy market skeptics.
As we move closer to 2020, a number of uncertainties remain: the strength of global economic growth and oil demand; the outcome of yet another round of U.S.-China trade negotiations; the pace of growth of non-OPEC supplies; the political status of Iran, Venezuela, Iraq, and Libya; the impact of International Maritime Organization regulations on crude preferences; fracking, flaring, and environmental regulations for U.S. wells; crude prices and finance availability for producers—to name just a few. In the long-term, climate regulation, peak oil demand, and alternative fuels will undoubtedly impact oil markets.
But for this week, look for OPEC to extend its supply cut agreement, with the Saudis taking a more active role, if necessary, to preserve the pact. They simply have no other choice.
Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Guy Caruso is a senior adviser with the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2019 by the Center for Strategic and International Studies. All rights reserved.
That said, a number of factors have conspired to undermine the OPEC strategy, not the least of which can be traced to both the variability in oil demand as well as the robust supply coming out of non-OPEC sources, especially the United States. Sanctions, political upheaval, economic growth, and trade wars have also impacted both supply and demand. Market positioning has only added to the short-term volatility.
As OPEC convenes, additional uncertainties abound. Renewed hopes that the United States and China would strike a trade agreement along with positive stock draw data (as refineries come out of turnaround season) and reports of key OPEC members advocating for additional supply cuts (over and above the current 1.2 million barrels per day reduction) lifted (Brent) oil prices to over $63 per barrel. Market optimism was also buoyed by difficult or deteriorating conditions in places like Libya and Venezuela, Iraq and even Iran (exempt from the cutback but still under sanctions).
Further complicating matters, certain Russian companies have suggested that they’d like condensates excluded from their (voluntary) quota target. Saudi energy minister Prince Abdulaziz bin Salman has aggressively called on member countries to step up their supply cut compliance as a way to tighten global supplies and even suggested the kingdom might be willing to extend its over-compliance to further incentivize the group’s actions. At the same time, he also cautioned that Saudi Arabia was no longer willing to compensate for other’s non-compliance. Yet Saudi Arabia can ill afford to see prices plummet on the day they set the price for Aramco’s valuation.
Among the most obvious compliance laggards are Iraq, Nigeria, AND Russia. And while Iraq had recently committed to reduce production to achieve compliance, Prime Minister Mahdi’s resignation and the ongoing protests and political crisis may put that commitment in jeopardy. In the past two years, Nigeria has actually increased its output. Russia’s role and commitment to the OPEC plus alliance has been optically important, but their compliance with cutbacks has been intermittent and lackluster at best.
Also on the agenda for this week’s discussion is if, how, and when to extend or expand the current agreement. Russia reportedly would like to defer deciding on any extension at least until the current agreement is ready to expire next March. Other members fear that a failure to provide such clarity, especially after the recent rise in prices, would precipitate another price drop both now and into early 2020 when crude demand recedes as refiners move back into maintenance. These members appear to support extensions of between three and nine months, and options of additional cuts of between 400 and 800 thousand barrels per day are reportedly being discussed—although the timing and composition of such additional cuts would need to be meaningful to satisfy market skeptics.
As we move closer to 2020, a number of uncertainties remain: the strength of global economic growth and oil demand; the outcome of yet another round of U.S.-China trade negotiations; the pace of growth of non-OPEC supplies; the political status of Iran, Venezuela, Iraq, and Libya; the impact of International Maritime Organization regulations on crude preferences; fracking, flaring, and environmental regulations for U.S. wells; crude prices and finance availability for producers—to name just a few. In the long-term, climate regulation, peak oil demand, and alternative fuels will undoubtedly impact oil markets.
But for this week, look for OPEC to extend its supply cut agreement, with the Saudis taking a more active role, if necessary, to preserve the pact. They simply have no other choice.
Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Guy Caruso is a senior adviser with the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2019 by the Center for Strategic and International Studies. All rights reserved.
