Break up of OPEC Plus
THE international media yesterday reported the possible breakup of OPEC and the second biggest oil producer Russia. The latter will split away from its agreement of December 2016 with Saudi Arabia and the rest of OPEC members which was aimed to reduce oil production to give better support to the oil prices.
The collaboration with Russia did its magic in terms of strengthening the oil price to extend beyond $65 per barrel. Through this collaboration, OPEC boosted its position in harmonizing oil price, gaining political strength globally as a reliable supplier.
The Russian oil industry was not very happy to join the OPEC quota and reducing its production. This was because the Russian oil companies were totally satisfied with the oil prices. Any level between $45 and $50 per barrel is quite satisfactory in generating enough cash and profits. On the other hand, their concerns were related to losing market shares to other suppliers and USA shale oil producers. So, the Russian oil producers, from the beginning, were not in agreement with their government’s decision to reduce oil production. Nevertheless, they did it with great reluctance. However, Russia barely reduced its production, but remained verbally committed.
Saudi Arabia, Kuwait and the United Arab Emirates remained fully committed. In fact, Saudi Arabia took upon its shoulder the heaviest cut in its oil production and is still pursuing for further cuts to keep the oil prices as close as possible to $60 a barrel.
In its coming meeting in March, OPEC will request for further cuts of 600,000 barrels. Saudi Arabia is trying hard to find consensus to its call for further cuts. The Russian government’s argument is that Libya is already doing the cuts by reducing production reluctantly by one million barrels; due to which there is no need for further cuts this time. For this reason, Russia is planning not to accept joining Saudi Arabia for the additional cuts in OPEC during their upcoming meeting next month.
Perhaps it is time for OPEC to let the free markets behave and do its own magic especially in today’s extraordinary circumstances topped by coronavirus, and impossible to read and predict markets behavior.
Russia might be right this time in not joining OPEC, while OPEC Plus remain intact.