Khalid Al-Falih hands Alexander Novak the keys to OPEC decision making in the office of the group’s secretary general. Source: Russian Energy Ministry
The oil producer’s group has been seriously weakened by its need to bring an outsider into its heart to broker a deal on output.
If anyone doubted that OPEC is now little more than a zombie organization, the last 10 days have proved it.
The
group has shown itself incapable of making it own decisions. Its
smaller members have borne the brunt of an agreement to cut output that
was only achieved after Russia took control of discussions from the
heart of OPEC’s head office. Then, even after Saudi Arabia announced it
would reduce supply by nearly a million barrels a day by January, oil
traders merely shrugged.
It is a sad result for an organization that once made governments tremble. Here’s how it unfolded.
OPEC oil ministers gathered in the group’s secretariat
building on a wintry Thursday in Vienna. Weakening demand growth and
soaring U.S. production prompted agreement that they needed to reduce
production in order to balance the market in 2019. What they didn’t see
eye to eye on was how to share that burden.
Saudi Arabia insisted that all members should play
an equal part, cutting by the same percentage from a new baseline set
at October’s production level. Naysayers argued that, given how the
group’s biggest producer had boosted its own output by more than a
million barrels a day since May, it should therefore bear the brunt of
the cuts needed to get the market back into balance. Furthermore, Iran
led a contingent of countries claiming their special circumstances
warranted exemptions.
The stand-off looked very similar to the one that had scuppered a deal in Doha
in April 2016 – something that nobody wanted to repeat. But by the end
of that Thursday, Dec. 6, officials had failed to reach an agreement and
Saudi oil minister Khalid Al-Falih said he was “not confident” one was
possible. The gala dinner at the Liechtenstein Palace was sparsely
attended, with both the Saudi and Iranian delegations, among others,
skipping the event.
Friday, the day originally scheduled for the
group to meet with its partners, began little better. OPEC ministers
were once again locked away in discussions. The talks went nowhere, and
the OPEC+ meeting got pushed back to the afternoon.
Then the Russians arrived.
Bilateral
discussions to hammer out negotiating positions are a regular feature
of the days and hours before the main OPEC gatherings. They take place
in the suites of Vienna’s grandest hotels, where the various delegations
are holed up. In recent years, the Russians have been part of this
scene.
But when Russian Energy Minister Alexander Novak arrived
Friday morning, he moved in to the office of OPEC’s Secretary General.
If ever there was a symbol of OPEC’s demise, it was this. He then
summoned first Iran’s oil minister, then Saudi Arabia’s, for about 45
minutes each. Two hours later, the group reached a deal. And Iran, Libya
and Venezuela got their exemptions, even if they didn’t appear in the
final communiqué.
The agreement that emerged is, on paper, fair
and reasonable. OPEC will cut production by 800,000 barrels a day from a
new baseline of October 2018 production, with participating members
cutting by 3 percent. The group’s partners will reduce their supply by 2
percent, contributing a further 400,000 barrels a day. That combined
reduction is just about enough to balance supply and demand in the first half of next year.
Saudi
Arabia went even further. Al-Falih said the kingdom’s production would
fall to 10.2 million barrels a day in January, down from 11.1 million
last month.
That looks like a huge cut, but it is still 150,000 barrels a day above its target under the original deal.
And
this is where the inequality of the new OPEC+ deal becomes apparent.
Saudi Arabia, Russia, the United Arab Emirates and Iraq boosted their
combined output by almost 1.6 million barrels a day between May and
October. That not only contributes to the current glut, it also gives
them much higher starting points for the latest cuts than for the
previous ones. Other OPEC members all face lower starting points.
The effect has been to shift a disproportionate
share of the burden of OPEC’s supply management since 2016 onto the
group’s smaller producers.
Handing control of OPEC decision making to the Kremlin has
come at a high cost for the group, and most particularly for its smaller
members. Some of the latter were already feeling marginalized. This
latest deal will do nothing to change their view and the divisions
between the organization’s “haves” and “have nots” will only widen.
Russia
has done very well out of this. It agreed to cut output by 230,000
barrels a day from its October output level of 11.42 million. That would
reduce its production to 11.19 million barrels a day, a figure that is
just 15,000 barrels below its original 2016 baseline — a cut of just 0.1
percent.
Contrast that with OPEC member Algeria, which produces around
a tenth as much oil as Russia. Its new target will be 1.023 million
barrels a day. That’s a cut of 66,000 barrels a day, or 6.1 percent
below the 2016 baseline.
And what did this all achieve?
Oil markets have reacted with indifference.
After a brief rally when the deal was revealed, Brent subsequently sank
back below the level it was trading at before the meeting began. Perhaps
traders don’t believe the group will be able to implement the
arrangement, or are waiting to see evidence that it’s taken effect.
OPEC has lost a lot for very little gain.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
No comments:
Post a Comment