Ariel Cohen is a Senior Fellow at the Atlantic Council and the Founding Principal of International Market Analysis, a Washington, D.C.-based global risk advisory boutique. This article first appeared in Forbes.
Despite ongoing geopolitical and diplomatic turmoil, OPEC and its new petro allies–led by Russia–emerged with an agreement to boost crude output by 1 million barrels per day (b/d) in the name of “market stability.” This was a major achievement at the recent OPEC summit in Vienna.
The deal represents the latest successful policy effort by the 24 member supercartel, informally referred to as the “Vienna Group” or “OPEC+,” to put their thumb on the scale of global oil markets. And it’s a huge thumb indeed.
OPEC’s 14 members control 35 percent of global oil supplies and 82 percent of proven reserves. With the addition of the 10 Non-OPEC nations, notable among them Russia, Mexico and Kazakhstan, those shares increase to 55 percent and 90 percent respectively. This affords OPEC+ a level of influence over the world economy never seen before.
Thanks largely to Venezuela’s economic implosion and supply disruptions in Libya, OPEC+ overshot its negative production adjustment by 50 percent, taking 2.8 million barrels off the market.
Those following oil markets will recall that cooperation between OPEC and non-member nations was formalized in late 2016 under a joint pledge to cut production by 1.8 million b/d (1.2 million b/d from OPEC and 600,000 b/d non-OPEC). The objective was to reinvigorate oil prices suffering from a global economic slowdown and a deluge of U.S. shale oil. And reinvigorate them they did. Prices jumped 40 percent between the November 2016 “Declaration of Cooperation” and May of 2018, with the Brent crude international benchmark now hovering near $75 per barrel. Thanks largely to Venezuela’s economic implosion and supply disruptions in Libya, OPEC+ overshot its negative production adjustment by 50 percent, taking 2.8 million barrels off the market.
The June 22 output increase was ostensibly justified as a means to bring compliance levels back to 100 percent of the original 1.8 million b/d production adjustment–a necessary move to guarantee market stability in light of shrinking global inventories, an improving global economy, and growing demand. The only problem is that only four countries–Russia, Saudi Arabia, Kuwait, and the UAE have the capacity to boost production. It is these countries alone that stand to benefit from bringing additional supplies online, and helps to explain vocal opposition by Iran, Venezuela, and Iraq–who are already pumping near their maximum.
The old OPEC is dead, and OPEC+ now stands in its place. What will its reign bring?
With threats by U.S. President Donald trump to punish any nation that purchases Iranian oil after November 1, 2018, Tehran is eager to make what revenue it can from the 2 million b/d it currently exports while prices hold at their three and half year high.
In the end, Iran and other price hawks were forced to accept the modest output hike of 1 million b/d, some 500,000 b/d short of the figure proposed by Russia.
During the opening game of the World Cup this month, Russian President Vladimir Putin met with Saudi Crown Prince Mohammed bin Salman (MBS) to discuss his intent to ramp up production regardless of OPEC consensus. The view of the two oil kingpins was one to behold, ushering in the new era in oil price “management.”
To make his case for upward production adjustments, Putin played on Riyadh’s fears that quickly rising prices could curb consumer demand and kill the goose which lays the golden egg. I imagine The Kingdom did not need much convincing. For the Saudis, increased market share and a weakened Iran are two good reasons to lift output on their own. When combined with additional pressure from the United States to alleviate rising prices, as illustrated by a number of President Trump’s tweets, production hikes were a foregone conclusion.
Perhaps Trump, a friend of MBS and growing acquaintance of President Putin, could join the oil triumvirate, though he would need to find a way to command America’s 10.5 million b/d of oil output the way the czar and the crown prince do. He does have aspirations of energy dominance, after all.
There once was a time when OPEC did not need to rely on outside producers to achieve its policy goals. That time has passed. The old OPEC is dead, and OPEC+ now stands in its place. What will its reign bring?