OPEC: the name has cowed governments, brought airlines to their knees, at one stage paralysed the developed world. But it seems as if OPEC’s ability to control oil prices, to really set the pace at which energy is bought and sold, may be coming to an end.
The OPEC countries meet this week in Vienna, but this will be a very serious symposium for the oil producers. This will be OPEC’s 175th meeting, and the first for its latest member, the Democratic Republic of the Congo.
OPEC members will push for higher oil prices
Many OPEC members are going to be asking for higher oil prices to help fund reform and welfare programmes, or to service foreign debt. But at the same time the US has been applying pressure on OPEC to keep energy prices low.
In December 2016 OPEC cut its output by 1.2 million barrels per day to around 32.5 million in response to a slump in oil. Non-OPEC members, an increasingly influential group led by Russia, now the world’s largest oil producer, helped to trim that further.
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The cuts were eventually extended to March of this year, with OPEC’s output cuts at times reaching 1.8 million barrels, or 150% of target. In June OPEC decided to move production back to at least 32.5 million, but exceeded that in October, reaching 39.2 million barrels per day.
Downward pressure on oil prices
There are a number of very significant downward pressures being applied to the oil price, among them rising US output from shale, increased US stockpiles, exemptions to American sanctions on Iranian production, cuts to 2019 demand forecasts and very high levels of speculative buying on oil futures markets.
On top of this OPEC has itself taken a more relaxed stance, which has driven the oil price down from $80/bbl to $60/bbl, a major shift which many short oil traders will have taken advantage of.
But one trend we have noticed is the increasing collusion between Russia and Saudi Arabia when it comes to oil production. These countries are ranked two and three in the world behind the US. If they are able to hold informal talks on oil production, as they did at last weekend’s G20 summit in Buenos Aires, then they will be able to exert a much more significant influence over the oil price than OPEC does.
OPEC’s battle to stay relevant
Obviously, OPEC will want to remain relevant – smaller countries, like Congo, which has just signed up, still recognise the value of collusion when it comes to setting the oil price, but if two of the biggest producers are not even IN OPEC, and Saudi Arabia is prone to sit down for informal discussions with Russia, then cracks are starting to appear.
The departure of Qatar from OPEC is seen as another symptom of problems within the organisation: Qatar has already been diplomatically isolated by many of its Arab neighbours over allegedly financing terrorist groups, but the move has to be also seen as Qatar coming to the decision that it is now better off on its own.
For OPEC one of the big questions this week will be how to stay relevant, and avoid Moscow and Riyadh dictating the music at the party.