Siva Sooryaa World

Finding the Barrel Balance

In the contest between OPEC and its alliance members’ vs other non-OPEC members, who would prevail with the right balance?

By: Siva Sooryaa

In the contest between OPEC and its alliance members’ vs other non-OPEC members, who would prevail with the right balance?

On the last day of November ‘17 , the Organization of Petroleum Exporting Countries (OPEC) and a consortium of non-OPEC producers led by Russia agreed to extend oil output cuts until the end of 2018 to avoid an another supply glut. Since agreeing on rolling over global production cuts of about 1.8 million barrels a day, the group of oil-producing countries has succeeded in escalating the oil price by almost a third, back to above $60 a barrel. This has huge ramifications for the global oil market.

In 2014, there was a considerable slump in the price of an oil barrel, from $110-115 to as low as $27 in early 2015. Oil prices plummeted due to a variety of reasons: low demand, oversupply of oil, geopolitical conflicts in the Middle East, refusal by OPEC to cut prices at the right time. All these factors had a major effect on the oil price. But, the chief cause for such a plunge is pumping shale by US producers which flooded the market leading to a huge surplus. The US becoming one of the biggest oil producers on a global stage so quickly is a dramatic change in recent times. Low-price levels of oil began to hurt economies of OPEC countries severely which historically have been extremely reliant on oil exports to meet their fiscal budgets for decades.

This is precisely when the OPEC decided to jump into action. When US shale producers held on pumping shale out, OPEC members eventually teamed up with major non-OPEC producers such as Russia late last year to forge out a production cut of 1.8 million barrels of oil a day, about 2 per cent of global production.This strategy finally seemed to put an end to the oil slump; albeit temporarily. Brent crude oil prices were extremely volatile as it hovered between the 30s and 50s. It is just over the course of 2017 that prices have consistently been above $50 and recently,

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Figure 2: Crude oil prices over last 5 years projected by West Texas Intermediate

“it is now trading at around $64 a barrel, even after falling slightly this week. Some analysts see prices topping $70 next year”. What factors led to such an alliance between the members? Russia agreed to this production cut strategy given its comparatively lesser reliance on oil than OPEC economies. Apart, this alliance would also aid Russia’s political influence in the Middle East. Saudi Arabia, the de facto leader of OPEC, on the other hand needs at least a level of $60 per barrel to adjust its fiscal balance and for its Aramco initial public offering to be a success which is expected in the second half of next year. Aramco’s IPO is important not just for Saudi Arabia’s non-oil future, but as one of the world’s most efficient and low-cost oil producers, its longevity can be seen as an indicator of how the larger industry will fare. Another factor is the demand for oil. With world economic growth going in a positive trend, economists have been upgrading their forecasts which has indirectly led to demand in oil. Saudi Arabia’s conflicts with countries in MENA (such as Qatar, Iran) as well as their fear of being upstaged as market leader by non-MENA countries such as Venezuela, US are seen as another aspect behind their alliance with Russia.

How long would the alliance between Russia and OPEC continue? There has been intense lobbying in Moscow to keep the prices at this low level with an objective to keep the US shale producers away from grabbing the market share. Though that didn’t affect the final outcome of the Vienna conference, Kremlin warned that they would pull out when the oil scenario improves and suits them. On the other hand Saudi Arabia is making its maximum efforts to continue with the production cut, convincing OPEC members and Russia. What they don’t both see is that “they may end up fighting over customers again when faced with a relentless tide of crude exports from the U.S., said Ed Morse, head of commodities research at Citigroup Inc. in New York”.

What happens next? Oil price movement and consequently OPEC continuing the extension depend on the production levels of America. US shale companies are aggressively advertising its cheap prices to developing Asian and African countries, hungry for the fuel to power their economies (despite environmental concerns over its pollution output). In fact, just after the extension of production cuts was announced, the latest data from the IEA has confirmed that US shale oil production has exceeded expectations.

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Figure 3: Increase in US crude oil exports

Whether the oil exported is in crude form or refined into petrochemical products, the US oil industry is definitely transforming into a major global exporter. Case-in-study: India, the third largest crude oil importer has started accepting American imports for the first time from this October. On the other hand, even America has to be watchful of its remaining shale oil stock. A recent report published states that shale oil exports would reach its peak in 2018 and collapse after that.

For some OPEC countries, the final years in the oil business would mean the diversification of over-dependent yet semi-developed countries (Saudi Arabia, UAE). For others, it would mean obtaining capital to resurrect their war-striven societies (Iran, Iraq, Nigeria). For the developed like USA and Russia, they are exploring and pursuing any alternate fuel (whether conventional or not) to pressurize OPEC to lower price. And for the rest (China, India), it is about finding the cheapest supplier. How long this precarious balance would continue is a matter of time. Right now, when OPEC and Russia meet again in the mid-2018, the consensus on next extension would absolutely depend on level of oil stocks and their prices. Then, the alliance would proceed with tackling what used to be their biggest customer once, the United States. This confrontation “has an endgame,” Morse said. “And the endgame is there’s an awful lot of shale in the world.”

 

WORKS CITED

OPEC Special Meeting. 30 Nov. 2017, http://www.abo.net/en_IT/specials/special-Vienna-Opec.shtml. Accessed 7 Dec. 2017.

OPEC Leader Cites ‘New Optimism’ With Oil Prices on the Rise. (2017, November 29). The New York Times. Retrieved December 3, 2017, from mobile.nytimes.com/2017/11/28/business/energy-environment/opec-oil-prices.html.

West Texas Intermediate Crude Oil price, 2012-2017. (2017, May 30). Retrieved December 03, 2017, from https://www.competitivefutures.com/west-texas-intermediate-crude-price/

Smith, G. (2017, November 27). OPEC’s Clash With U.S. Oil Is Nearing Its Day of Reckoning. Retrieved December 03, 2017, from https://www.bloomberg.com/news/articles/2017-11-27/opec-battle-with-u-s-for-oil-supremacy-nears-day-of-reckoning

US Oil Production Makes Waves. (2017, June 19). Retrieved December 03, 2017, from https://geopoliticalfutures.com/us-oil-production-makes-waves/

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