The Organization of Petroleum Exporting Countries (OPEC) is a group of fourteen member nations (Saudi Arabia being the de facto leader) best known to be a swing crude oil producer. This idea is based on the premise that other sources of crude oil supply operate at full capacity leaving the cartel to play the market-balancing role of matching total supply with total demand. Its function is simple: Stabilize the oil market by ensuring efficient supply of petroleum while guaranteeing a steady income to producers and a fair return to investors in the petroleum industry.
Then in December 2016, ten non-OPEC producers (led by Russia) agreed to corporate with the cartel and together formed a larger group known today as OPEC Plus (OPEC+). The non-OPEC countries include Azerbaijan, Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan. While the rationale behind this historical landmark was to accelerate the stabilization of the global oil market by effecting production adjustments, these production cuts are non-binding (voluntary).
However, Russia and the other non-OPEC producers have continued to corporate with Saudi Arabia and OPEC; but for how long?
OPEC+ Crude Oil Production
Based on the fundamentals of supply and demand, oil price rises if quantity demanded is more than quantity supplied and they plunge if quantity demanded is less than quantity supplied (although not necessarily true, considering the treacherous impact of the futures market). OPEC in establishing production cuts usually aims to keep prices high and avoid a glut of supply.
With the corporation of its allies, OPEC has been reducing oil output since 2017 (fig 1a), and in July 2019 agreed on a 1.2 MMbpd supply cut until March 2020, before convening again in December.
Notable is the fact that while OPEC+ production has dipped, the United States (U.S) production since 2017 (fig1b) has been exponentially rising thus depleting the gains for the cartel.
However, of the 24 members of the newly formed group (OPEC+), Libya, Venezuela and Iran have been exempted from production cuts due to civil conflicts, economic collapse and U.S sanctions.
OPEC+ is doing its best to achieve crude oil prices at $70 per barrel but they have not succeeded even with Iranian and Venezuelan exports dipping as a result of U.S sanctions.
Prices have remained relatively low and projections into 2020 already indicate a reduction in the demand for the cartel’s oil. While many analysts attribute this to a couple of factors including the U.S snowballing production and the lingering trade war between the United States and China (two largest economies of the world), the situation does not seem to get any better for the cartel as U.S supply growth has been predicted to even increase.
According to the IEA, the United states is expected to lead oil supply growth over the next five years joined by other non-OPEC producers – Brazil, Norway and Guyana (fig 2)
On the political side, things are also looking gloomy for the cartel as the U.S wants Saudi Arabia to supply more crude in a swap for military support in its dead heat with arch-rival Iran. In addition to this, Iran has also come out to criticize Saudi Arabia for making decisions unilaterally with Russia, thus admitting to the fragility of the cartel.
Following the just concluded meeting of OPEC and its allies (the second of its semi-annual meeting), a decision was made and sealed. The cartel has not only agreed to extend its current supply cut of 1.2 million bpd but also deepen it by an additional 500,000 bpd. Although the cut would apply to just the first three months of 2020, this would amount to a total to 1.7 million bpd (1.7% of global supply) off the oil market.
The deal, however, would exclude condensates from non-OPEC allies like Russia. This means that Russia could still be on the chase for the top producer spot and compete with the U.S shale production.
How this will unfold is yet to be known. We hope to get back to this discussion as we approach closer and closer to March, 2020
BLOOMBERG: “Saudis, Russia diverge on oil output before OPEC+ meeting”, November 20, 2019, https://www.bloomberg.com/graphics/opec-production-targets/
IEA:“Oil 2019”, March,2019, https://www.iea.org/reports/market-report-series-oil-2019
OIL PRICE: “OPEC+ agrees to deeper cuts”, December 5, 2019, https://oilprice.com/Energy/Crude-Oil/OPEC-Agrees-To-Deeper-Output-Cuts.htmlutm_source=browser&utm_medium=push_notification&utm_campaign=vwo_notification_1575605605&_p_c=1
OPEC: “Declaration of Corporation”, Accessed on 12/06/2019, https://www.opec.org/opec_web/en/publications/4580.htm