Russia and Saudi Arabia have stated their support for the group of 24 oil producers to increase production gradually in the second half of the year. The two countries, who until recently were supporting an extension of cuts, signaled on May 25 that producers could exit gradually from the deal. What triggered such a change?
Political motives aside, there are two clear reasons: First, the unhappiness of consumers with Brent oil prices passing the $80 mark; second, the International Energy Agency’s declaration that OPEC and its allies have accomplished their mission with oil stockpiles in OECD countries back to their five-year average. Pressure was building in recent weeks from both consuming nations and Russian oil companies — who have production expansion plans and who don’t like to be told to cut for a very long time.
Still it was a surprise, at least for OPEC ministers and some of those outside the group who were under the impression that production cuts would remain in place until the end of 2018. Saudi energy minister Khalid Al-Falih gave that impression when he declared on many occasions that keeping the agreement till the end of 2018 was important.
OPEC knows that the mission is accomplished, but can’t say that because the market situation is still not clear in the second half. What was clear was that the market was tightening with demand increasing while supply was lagging behind on output falling in Venezuela and Angola.
OPEC should have begun to think about an exit strategy but instead started looking at other metrics that might support their decision to extend the cuts for a few more months.
The Joint Technical Committee of OPEC+ acknowledged in its two-day meeting this month that the market has rebalanced and oil stockpiles are shifting from surplus to deficit, and they are at 20 million barrels below their five-year average. OPEC countries knew this but wanted the cuts because prices are edging higher. Many are quietly unsatisfied with the Saudi-Russian push for increased production and some are saying this boldly. Ecuador, one of the smallest oil producers in OPEC, announced on May 29 that the cuts should continue.
All this shows that the coordination between OPEC and its allies isn’t great these days. This is also clear when it comes to defining the right oil price.
Russian President Vladimir Putin told reporters over the weekend that oil prices at $60 is fair. Iran’s oil minister Bijan Zanganeh said last month that oil prices should be about $60. The Saudi Arabian energy minister said he doesn’t know what the right oil price should be but that current oil prices aren’t the right ones to bring investment to the industry.
Consumers are also exerting pressure on OPEC+. The US president expressed his concerns on Twitter over oil prices once they started going above $75. China, India, South Korea also complained to Saudi Arabia after prices passed $80.
The eternal problem with OPEC and consuming nations is communications and mistrust.
Wael Mahdi
It is hard to satisfy everyone but it always comes down to one thing: The right pump prices for politicians. Both politicians and consumers don’t think about the big picture, and that low oil prices today may result in higher oil prices in the future.
Although many believe that OPEC shouldn’t let the oil market overtighten and stocks go into deficit, prices should always be at a level that keeps investment because this will save consumers in the long run. But OPEC isn’t to blame alone, and the financial restrictions the US is imposing on Venezuela is making it difficult to increase output.
The eternal problem with OPEC and consuming nations is communications and mistrust. OPEC has used many excuses in the past to keep oil prices high.
OPEC should have announced that the market is in balance and that higher oil prices are needed for investment. But consuming nations don’t see that. They say developing countries with a long track record of mismanaging public funds are seeking higher oil prices to fill their coffers.
What is next for the (OPEC+) alliance? They meet on June 23 to discuss the future of the alliance and the current cuts agreement. There aren’t many options. Russia wants lower oil prices. The only way to do that is to increase production. Russia seems to be looking at 800,000 barrels a day, an amount that will bring the conformity rate back to 100 percent.
So the deal is not done, and OPEC and Russia still need each other for next year and even beyond. Finding common interests and improving coordination among participants in the deal, in addition to focusing on long-term goals, should be the essence of the next meeting — and not only keeping consumers happy for a few months.
As for the price, $70 seems to be a happy number for all.
- Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?”