By: Siva Soorya

With OPEC transforming into a Saudi-Russian clique, who would emerge as the winner of crude oil prices for the next year?

Last year on 30^th November, 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. The decision has largely been in force until the meeting on June 26 when the OPEC+ group announced that the associated countries would maintain its collective target while lifting its country-specific limits on oil production. In response to criticism that the announcement was ‘vague’ in nature (as the official OPEC statement following the Friday meeting did not include a ceiling figure), Saudi Arabia, the de facto leader of the group confirmed that the move would lead to the increase of 1 million barrels per day. This has both immediate and long-term implications for the market.

The immediate implication is that oil prices have fallen per barrel but now have risen back. “The trade tensions and overall global market concerns are what’s holding crude oil back today (around the time of the announcement),” said Bill Baruch, president of Blue Line Futures in Chicago. With uncertainty over the production output levels of Iran and Venezuela(two important OPEC members) due to their respective political and economical climates, not all OPEC members are expected to increase their supplies.

Oil prices over the last few months

A lot has changed since the last two months. As stated in previous Econ Review articles, which can be found here, overall world economic growth has been positive for the last couple of years and is expected to be ‘healthy’ for the rest of this year as well, which has led to a genuine demand for oil supply. Hence OPEC feels that it is time to increase supply. In fact in March it said, “world oil demand would rise by 1.59 million barrels per day (bpd) this year, an increase of 60,000 bpd from the previous forecast”. Unfortunately for them, its main competitor, theUS, and other countries (through shale oil) also feel the same and have also decided to hike their output levels to meet the demand. However, now questions are being asked whether OPEC itself would be able to compensate for the rising demand as a Reuters poll of 35 economists had revealed that the cartel would fail to achieve its output target and need Russia to jump in to make the required supplies. Sanctions on Iran as well as political and social unrest resulting in an unstable economic environment as well as disruptions from other major producers such as Libya are attributed to be the main causes.

It is also important to keep in mind the rising tensions between Saudi Arabia and Iran as they jostle for the dominant leadership position in the Middle East. While the ‘proxy war’ between them has been playing out for the last two years, it is now starting to affect OPEC’s capability to make a decision on the supply cut. This OPEC meeting had been one of the most contentious one in recent times. “On the one side is Saudi Arabia and Russia, who want to relax the quotas. In the other corner is Iran, Iraq and Venezuela, who are threatening to veto the Saudi-Russian proposal”. The result of Venezuelan oil system is from the fact that US shale oil has taken over key markets where Venezuela used to supply while Iran, Iraq face the war against ISIL, US sanctions and civil unrest which resulted in depleted oil budgets.

Once again, the meeting expands on the notion that Saudi Arabia and Russia want to have more power and control to reshape the global oil market according to their needs. This is in response to the fact that even before the meeting, both Saudi Arabia and Russia have expressed support for hiking output, although other exporters have indicated a preference for curbs to stay in place. The Kingdom definitely don’t want a repeat of the 2011 OPEC Summit meeting where the country was outvoted by other OPEC members on a similar issue of oil cuts. Hence, it definitely wants to form a group where it would assert even more direct authority. Bloomberg has reported that “larger producers such as Saudi Arabia and Russia might be given more weight in the new body”.

It would be interesting to see if this group can replace OPEC as the traditional go-to organization for controlling the oil demand, balance supply and price. If this happens, there are many concerned with Russia’s expanding role in monitoring such a critical energy market. Critics also are apprehensive over the functioning of this organization, given that each country has a wide disparate range of interests.

At the same time, OPEC is also making sure their relationship with USA doesn’t sour out. They generally keep the latter informed about its decisions beforehand; in fact their representatives are meeting this week again for the third time this year. US President Donald Trump had tweeted that he hoped OPEC would keep the prices down and considering the warm relations between the newly-crowned prince of Saudi Arabia and USA, they are likely to comply. In fact, according to Reuters, “a high level Trump administration official called Saudi Arabia a day before Trump was set to announce the U.S. withdrawal from the Iran nuclear deal, asking for more oil supply to cover for disruptions from Iran”. It is interesting to note that the last time this situation occurred, oil prices reached $140 per barrel back in 2013.

One factor which is holding back US crude oil companies from performing to their full potential is the Syncrude outage.“Losses in U.S. crude prices were limited by the likelihood that an outage at Syncrude Canada’s 360,000 bpd oil sands facility would last through July”. Aside from the highly anticipated meeting, markets have also had to contend with the threat of a trade war between the world’s two largest economies. Also, USA is expected to lose the most if they proceed with the trade war with China as the latter might impose 25% tariff on all US imports (China being bein its second-largest exporter). In case of reduced U.S. oil exports to China, the biggest winner of an oil trade war will be OPEC.

In the end, it is safe to conclude the vaguely worded communique given last week was just a front excuse for Saudi Arabia and Russia to increase its oil outputs, not taking into account concerns of non-performing OPEC members such as Iran, Iraq, Libya and Venezuela. Once upon a time, OPEC did not need to rely on outside producers to achieve its policy goals. Times have changed and Russia-Saudi Arabia is now expected to have the final say on any oil-related supply. Would the US under President Trump join this group to further tighten control? Things would be more clear by end of this year.

Works Cited

“Al Arabiya.” Al Arabiya, Al Arabiya, Vienna, 23 June 2018, Retreived from english.alarabiya.net/en/business/energy/2018/06/23/Saudi-pledges-measurable-oil-supply-boost-as-OPEC-Russia-agree-deal.html.

Bloomberg. “Oil Slumps near $64 as OPEC Clash Looms, US-China Trade War Escalates.” Business Standard, Business-Standard, 18 June 2018, Retrieved from www.business-standard.com/article/markets/oil-slumps-near-64-as-opec-clash-looms-us-china-trade-war-escalates-118061800109_1.html.

Gamal, Rania El. “Exclusive: Trump Requested Saudi Oil Support before Iran Nuclear…” Reuters, Thomson Reuters, 7 June 2018, Retrieved from www.reuters.com/article/us-oil-opec-usa-exclusive/exclusive-trump-requested-saudi-oil-support-before-iran-nuclear-decision-sources-idUSKCN1J31XU.

Kennedy, Will, et al. “Russia-Saudi Plans for Super-OPEC Could Reshape Global Order.” Bloomberg.com, Bloomberg, 22 June 2018, Retrieved from www.bloomberg.com/news/articles/2018-06-22/russia-saudi-plans-for-super-opec-could-reshape-global-oil-order.

Lawler, Alex. “OPEC Sees Higher 2018 Oil Demand, but More Rival Supply.” Reuters, Thomson Reuters, 12 Feb. 2018, Retrieved from in.reuters.com/article/opec-oil/opec-sees-higher-2018-oil-demand-but-more-rival-supply-idINKBN1FW152.

Mersie, Ayenat. “Oil Drops as Market Braces for More OPEC Crude and Wall Street Slips.” Reuters, Thomson Reuters, 25 June 2018, Retrieved from in.reuters.com/article/us-global-oil/oil-drops-as-market-braces-for-more-opec-crude-and-wall-street-slips-idINKBN1JL02P.

TradingEconomics. (2018). “Historical Data of Crude Oil.” [Data File].