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Is OPEC Still Relevant To Global Oil Market?

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The just – concluded meeting of the acclaimed oil cartel group, the Organisation of Petroleum Exporting Countries (OPEC) has raised fears as to its continued relevance in the global oil market. FESTUS OKOROMADU writes. 

Precisely two years ago, in the last days of November 2016, Vienna became the epicenter of global oil developments. A ground-breaking agreement, commonly referred to as the Vienna Agreements (also known as OPEC/OPEC+), was concluded there.

The deal in many ways was crucial to the stabilisation of crude markets that followed. Somehow, all the oil producing nations that managed to bounce back into profitability and overcome the severe hardships of the drastic 2015 price fall owed their success to the Vienna agreements.

In the same vein, Vienna took the central stage as the capital of the oil world again last week with two rounds of consultation taking place there, first between OPEC member nations, then with the inclusion of OPEC+ members within the framework of the Joint Technical Committee, co-chaired by Saudi Arabia and Russia.

The two-day Vienna summit started with high hopes, but quickly transformed into a dreary spectacle, as expert argued that it only to birthed an unexpected deal. Observers had believed initially that the Saudi Energy minister, Khalid al-Falih, would be able to ram through a deal within OPEC and then the only issue to sort out would be Russia’s contribution.

Much of the speculation thereafter was focused on Russian energy minister, Alexander Novak, flying back to Saint Petersburg, allegedly to consult the cuts with President Putin, and Russian reluctance to commit to a 300kbpd production cut. Everything was ready, it seemed – the baseline month (October), the overall cut level (after lengthy discussions all the sides adopted the 1mbpd as a target), yet eventually the negotiation process was distracted by the usual source of intra-OPEC conflict, antagonism between Iran and Saudi Arabia.

These hassles are not to understate the fascinating transformation OPEC has gone through in the 2010s. After the December 2011 Vienna meeting, OPEC did not convene top-level summits for 4 years, largely on the back of Saudi Arabia walking off from the traditional quota distribution system and scrapping any sort of aggregate OPEC production limits.

Inevitably, since Saudi Arabia is pretty much the only OPEC member that can calibrate its output depending on market conditions – the others produce as much as they can, not as much as they wish – Riyadh’s actions marginalised OPEC as a decision-making authority.

Experts said it was almost unbelievable to realise, perceiving it from a present-day perspective, to what extent did the OPEC+ deal revitalise OPEC and bring it back from the dead-end it was headed for.

They thus argued that the powers of history might bring OPEC back to square one and turn it into an assembly of squabbling, mostly Middle Eastern nations, with Saudi Arabia ramming its decisions through under the guise of their mutuality.

This is even as Saudi Arabia itself perceived to be entrapped in a triple dilemma – it wants to keep OPEC a viable solution in case markets turn to oversupply or vice versa, it genuinely wants to build a new strategic partnership with Moscow (the only super producer apart from Riyadh that is ready to take part in output cuts) and it wants to maintain a healthy relationship with the United States.

The latter has become quite problematic recently as any production cut immediately entails a Twitter response from President Trump, blaming Riyadh for hiking fuel prices, and only output increases raise laudatory tweets.

The Russian political leadership cherished the prospect of deeper cooperation, yet cannot take up an immediate commitment. In the words of LUKOIL , CEO, Vagit Alekperov, Russian companies would gladly join the output cut, yet because of the cold weather it would be easier and safer for them to do so once the cold winter ends.

Traditionally, Russia’s oil production is the lowest in March-May when the thawing of ice and the onset of more volatile climatic conditions encumbers transportation from and development of the field. The same mood is to be found generally with CEOs of Russian majors – they said an output cut was necessary and were happy to comply with any decision of the energy ministry, albeit with a proviso – from spring.

Experts have submitted that Russian involvement in OPEC cuts was heavily tilted towards the non-performance of obligations. The first time Russia took place in an OPEC-led production cut was in 1998, when against the background of financial turmoil in Asia (and the Russian bankruptcy crisis), the Boris Yeltsin-led Kremlin administration pledged to a 7 per cent cut, which at that time would have translated into decreasing annual output by 20 million tons from an aggregate of 303 million tons.

Despite its vows, Russian oil companies did the exact opposite, increasing annual production in 1999 to 306 million tons, whilst Saudi Arabia cut 650kbpd of it. This might be explained by the erratic character of Russian foreign policy under President Yeltsin, however, the second case of inobservance occurred already under President Putin in 2001.

In September 2001, amid 9/11-induced panic on the market, OPEC members agreed to scrap 1mbpd worth of production from the market and Russia agreed to participate in this by committing to a relatively modest 50kbpd cut. And again, against the background of Riyadh cutting output by 300kbpd, Russian oil companies effectuated a real tour de force. Russian companies increased production by a spectacular 650kbpd year-on-year, bringing it to a then-record level of 7.8mbpd.

Russian ministers stated they could not impose the production quota as the companies bypassed the state-owned pipeline transportation monopoly, Transneft’s system and chose to transport the surplus volumes by rail to their final destination or port.

Yet the Russian problem is by no means an unsolvable one – since Saudi Arabia wanted a longer-term quota system which runs until at least Q3 2019, a piecemeal solution whereby it cuts production first and then Russia joins in at a later stage is still be better than nothing. According to first reports Russia is to commit to a 0.2mbpd cut (out of the 0.4mpd allocated for OPEC+ reductions), thanks to a last-minute consensual role breakdown Iran and Saudi Arabia would make up the largest part of OPEC’s 0.8mbpd cut. There has been very little talk of OPEC+ commitments apart from Russia, in case Oman, Mexico or Malaysia can carry it into effect, the overall OPEC/OPEC+ commitment level would amount to 1.2mbpd – a result deemed impossible after last Thursday’s series of stalemates.

Despite the successful ending, experts said what has become obvious, from last week’s meetings, was that the future of OPEC/OPEC+ appears uncertain as it has been overwhelmed by excessive media coverage of every step OPEC takes as an organisation. There are insinuations such coverage hurts the cartel’s maneuvering space and is sowing bad blood within members.

Those holding this opinion said it was for a reason that when mooting the creation of a new super-OPEC including Russia, Riyadh has deliberately tried to pass the buck to Moscow, claiming it.

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