In an expected outcome, the 169th OPEC meeting in Vienna did not result in a new official production target. The announcement reflects some level of failure on the part of member states to publicly demonstrate cooperation during a time of discord within the group and the lack of action to address the global supply glut. The meeting comes some six weeks after OPEC members and some non-OPEC producers failed in Doha to agree to an output freeze. However, analysts and market watchers continue to point to OPEC’s influence and importance despite narratives to the contrary.
The announcement reflects some level of failure on the part of member states to publicly demonstrate continued cooperation during a time of discord within the group and the lack of action to address the global supply glut.
At the same time, global oil prices are hovering at just under $50 per barrel, balances have tightened in the second quarter, and sentiment has flipped since the beginning of the year. “The market is working” was a common remark from ministers, analysts, and journalists at the meeting. For the most part, the changing situation in the market took pressure off of the group to take action—although it’s clear that friction among key members remains.
New Secretary General represents non-Gulf states
Mohammed Barkindo of Nigeria has been elected as the new Secretary General of OPEC, replacing Libya’s Abdullah el-Badri, who held the position for nine years.
Electing Barkindo gives voice to some of OPEC’s non-Gulf members, which see less influence in the group’s deliberations.
Barkindo was seen as the frontrunner for the position, having served as the head of Nigeria’s national oil company. As a candidate, some saw Barkindo as giving voice to some of OPEC’s non-Gulf members, which see less influence in the group’s deliberations. Nigeria is a mid-level producer in OPEC, thus Barkindo’s appointment reflects to some that the organization is trying to bridge gaps between the larger producers and the smaller ones. Moreover, the consensus on agreeing to electing Barkindo is a small victory for the organization in that members can show a unified front, albeit for a much less controversial issue than output targets and production cuts.
Addition of Gabon
“Gabon’s production of .24 mbd isn’t going to move the needle, but it shows that being an OPEC member is still valuable to smaller producers.”
Also at the meeting, OPEC readmitted Gabon to the organization. This comes on the heels of Indonesia being readmitted last year. The major question surrounding Gabon is why the Central African country, which pumps almost .25 mbd, is interested in joining OPEC. Bringing Gabon into the group serves both sides well. It gives Gabon perceived prestige, while also building the reputation of OPEC, since the organization can show examples of its relevance by noting more members want to join. “It doesn’t make sense to re-join an organization that is supposedly dead—even with Gabon’s budgetary challenges,” Jeff Quigley, the Director of Energy Markets at Stratas Advisors, told The Fuse, adding that it’s premature to assume the world has seen the end of a unified and relevant OPEC.
At the same time, however, Gabon’s production level is very low and will not give the cartel any more power over the global oil market.
“Gabon’s production of .24 mbd isn’t going to move the needle, but it shows that being an OPEC member is still valuable to smaller producers,” said Quigley.
What’s next for OPEC?
“Don’t take that notion that OPEC is dead.”
The failure to come to a consensus at the meeting has once again prompt questions about the cartel’s relevance and influence. OPEC’s president, at the press conference following the meeting, did his best to convey the group’s importance by saying that it is a “very valuable” organization.
“Don’t take that notion that OPEC is dead,” said Secretary General el-Badri, who noted that he’s heard that narrative 5 to 6 times at different points over his long career.
Determining country quotas is tricky at the moment because of the number of unique circumstances for different members. Iran is ramping up output at a rapid pace now that sanctions have been lifted; Nigeria is seeing a slew of production outages; Libya is experiencing political strife, but could boost output once a solution is found; Saudi Arabia holds spare capacity and could increase output to gain more market share; and Iraq has more upside potential.
“We need some time to come up with a number on how much we produce,” said el-Badri at the press conference.
The group is also growing concerned with lack of upstream investment and what the consequences will be in the coming years. “I think the biggest news out of this conference isn’t so much OPEC dealing with its diminished relevance or inability to intervene verbally much less with supply changes to stave off another bust in prices,” Bob McNally of the Rapidan Group told The Fuse. “The biggest news coming amid confidence that prices have bottomed is that latent Saudi concerns about another price boom in the coming years from the lack of investment are ticking up and registering both in pre-meeting discussions and the communique. OPEC is contending with the consequences of the total absence of a swing supplier in a market that needs one: The return of boom and bust oil prices. While some OPEC producers like Venezuela are still focused on the risk of too-low oil prices, Saudi Arabia is drawing the organization’s attention to the risk of too-high ones.”
“Even if they only use that spare capacity in extreme situations, they are seeing this low-cost environment as a way to invest in new projects that lay that foundation.”
The fact that market fundamentals are moving toward rebalance—albeit slowly given the commercial stock overhang and supply remaining ahead of demand—and the Saudis’ determination to hold spare capacity, the group will likely be in a position to reassert itself at some point in order to lessen volatility and keep fundamentals stable.
The Saudis claim that they are investing in new projects only to offset production declines and “maintain” current production capacity at 12.5 mbd. “Saudi Arabia’s push to control market volatility in the future can only be achieved by having ample spare capacity,” said Quigley. “Even if they only use that spare capacity in extreme situations, they are seeing this low-cost environment as a way to invest in new projects that lay that foundation.”