The demise of OPEC (Organization of the Petroleum Exporting Countries) has long been proclaimed and its obituary was written long before the historic OPEC and non-OPEC producers managed to pull off one of the least expected agreements in Vienna on December 10. They managed to coordinate a joint production cut between the two groups.
The meeting between OPEC and 21 non-OPEC countries resulted in a supply reduction commitment by 12 non-OPEC countries of 558,000 bpd cuts – slightly less than envisaged at the OPEC meeting on November 30 for six months starting from January 2017. The oil-producing countries that agreed to the deal were Azerbaijan, Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan.
The significance of the non-OPEC cuts lays not in the final production cut figure, which came slightly lower than the 600,000 bpd that OPEC had expected, but in the diversity of countries making the production pledges. These included Azerbaijan (35,000), Bahrain (12,000), Brunei (7,000), Kazakhstan (50,000), Malaysia (35,000), Mexico (100,000) and Oman (45,000) besides Russia, which reconfirmed its 300,000 bpd cut. Other surprising token cuts were pledged by Sudan and South Sudan, Bolivia and Equatorial Guinea.
If fully met, these non-OPEC cuts would take the total pledged cuts by OPEC and non-OPEC to 1.8 million bpd, and far more than the initial August Algiers OPEC agreement of under 1 million bpd, and would indeed have a significant element in helping to restore a semblance of balance between supply and demand. Of more significance is that Saudi Arabia is once more in control of a disparate OPEC cartel and has even hinted of yet greater production cuts over and above the agreed 30 November target of 486,000 barrels per day it committed to.
What is also going to underpin current market prices comfortably above the $50 pb levels was the news that after some initial conflicting reports, Saudi Arabia and other Arab OPEC Gulf states have officially notified their clients that they will indeed cut oil shipments from January 2017 to comply with the latest OPEC agreement, and analysts expect, the reductions in delivery to be more for the North American markets rather than the Asian, specifically the Chinese market, where Saudi Arabia sells more than 60 percent of its crude.
There could still be surprises along the way to unhinge the historic agreements made, such as the news that Kuwait and Saudi Arabia would start production from their joint Neutral Zone when both countries had committed to cuts at the November 30 Vienna meeting. Last month, former Kuwaiti oil minister Al-Saleh and Saudi energy minister Khalid Al-Falih had an initial agreement to resume output from Wafra and Khafji shared fields, without agreeing on a date for the resumption. Both countries hold equal shares of production and reserves at Wafra and Khafji, which have a combined output capacity of more than 500,000 barrels a day.
Some put this down to last minute strategy from the Saudis to make everyone come on board the OPEC agreement. However, others felt that the Saudi output from the Neutral Zone was to compensate for production cuts from older fields.
The November 30 OPEC meeting has taken many by surprise and the OPEC and non-OPEC meeting even more so because of the cynical view that no agreement would take place in this organizationDr. Mohamed Ramady
Russia’s participation, however, whether in a production freeze or an actual cut was always the major issue for OPEC, and specifically for Saudi Arabia, which had seen repeated Russian promises made but no action taken. The apparent Russian commitment to a production cut, whether from current production levels or via technical maintenance field shut downs has taken everyone by surprise.
However, Russia seems to have been convinced that this time OPEC would indeed come to an agreement, especially with Iran, so as to allow it to join in the new production targets and this had always been the argument put forward by Russian Energy Minister Novak.
The news that Qatar and Glencore are acquiring a 19.5 percent stake in Russia’s largest private oil company Rosneft might have been coincidental, but seemed to have focused Russian minds about cooperating with OPEC. This is given that Rosneft Chief Igor Sechin was always lukewarm at best in his commitment to join in any Russian freeze or cut, as Rosneft was not a national oil company like OPEC member’s state controlled oil company entities. It would not be surprising to see further investments in the Russian energy sector also by Saudi Arabia, given that several high level MOUs have been signed between the two countries by President Putin and Deputy Crown Prince Mohammed bin Salman.
The November 30th OPEC meeting has taken many by surprise and the OPEC and non-OPEC meeting even more so because of the cynical view that no agreement would take place in this organization. Repeated attempts to get OPEC to speak in one voice have failed since 2008 and there exists a perception that the organization has passed its use-by date.
However, OPEC seems to have reinvented itself now, albeit with some rough patches along the way. The crucial point of these meetings – independently monitored by the IEA – is that for the first time some serious inter-group negotiations and dialogue has taken place and borne fruit, as evidenced by the willingness of Mexico, one of the largest non-OPEC producers to change its mind and join in the planned production cut when it had declined all along.
The major unknown factor that still remains is the speed with which the US shale will come back on-stream and add to the missing barrels. This time, however, there is certainly a palpable feeling of seriousness among OPEC countries to cooperate – despite geo-political differences between Saudi Arabia and Iran. There also exists close working relationship between energy ministers of the two largest oil producers representing OPEC and non-OPEC blocs – i.e. Saudi Arabia and Russia – which have made this agreement possible. This indicates that a certain level of trust has been established.
This is important as a key hurdle to overcome going forward is verification and there is the belief that even if there was some non-compliance taking place, it will be minimal and mostly from countries who had argued that their production cuts should be based on their own primary sources rather than secondary sources.
As an old saying goes: “where there is a will, there is a way” it certainly indicates that there is a large element of willingness this time from both OPEC and non-OPEC producers to give this agreement a chance to succeed. The markets will be watching like hawks for compliance from February onwards once the January production figures are released.
Moreover, long before OPEC’s next meeting in June 2017 the world will have either witnessed the birth of a long lasting cooperative mechanism between the two blocs or a collapse in such efforts, with major producers reverting to maximizing their market share strategy at the expense of countries with little spare capacity, high production costs and fiscal stressed economies.
Everyone stands to gain by abiding, as much as they can, to the current production cut agreements, otherwise indeed the demise of OPEC will be very real.
Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.