OPEC plus Russia equals super OPEC
WHEN I read the recent comments of Saudi Crown Prince Mohammed bin Salman that OPEC is in talks with Russia to extend the current cooperation between the two for another decade or two, I immediately remembered Buzz Lightyear’s famous line in Toy Story: “To infinity and beyond.”
Then I recalled an article written almost a year ago by Bloomberg’s Liam Denning in which he also borrowed that phrase.
In the conclusion of an opinion piece published on May 8 he said: “In an energy market that is changing in fundamental ways, though, these countries are essentially trying to hold back the tide. If cuts are their only strategy, then they must maintain them not just for now but well beyond — maybe to infinity.”
Denning was writing at a time when few in the market believed that OPEC and its non-OPEC allies would succeed in their efforts to restore stability and support oil prices. Few believed that OPEC would reach a deal with other producers to extend the agreement to cut around 1.8 million barrels a day from global supply for another six months from its expiry date in December 2017.
In a surprising turn of events, OPEC and its allies succeeded in bringing down the glut in OPEC inventories by a great margin from 340 million barrels above their normal five-year average to under 50 million barrels in a less than a year.
Moreover, the deal was extended for another six months until June and it is almost certain now that all participating producers in the agreement will extend it till the end of 2018 and maybe beyond.
So what has happened? And will the cooperation between OPEC and non-OPEC go beyond 2018 and maybe to “infinity and beyond?”
The most obvious and clear reason why the deal succeeded was the efforts made by Saudi Arabia to make it succeed.
This deal is a deal of 24 countries, not just Saudi Arabia, although the country’s weight in the agreement is incomparable to others.’
It is the country that pledged to cut the most under the agreement — slightly more than 500,000 barrels a day.
It was the country that overperformed all other producers in the deal, including Russia, when it comes to cutting production by more than needed. But that came at a cost for Saudi Arabia.
The country’s market share in China was almost flat last year, while others like Russia increased exports to China substantially.
Saudi Arabia also reduced exports to the US to historically low levels last year to bring down oil inventories there as the US is the country with the most visible inventories and it makes up to 75 percent of OECD’s total oil and products stocks.
Saudi Arabia is de facto leader of OPEC and if the Kingdom manages the market and the organization well, then everything will fall into its natural place.
This is not to underestimate the weight of Russia in the agreement or in the market, but the Kingdom’s role is as important, if not more important in some areas, as the country is the largest oil exporter in the world.
This doesn’t mean that other OPEC countries are not important. But it is an established rule in the market that when oil prices are down, OPEC is OPEC as collective efforts are needed to support prices, but when oil prices are up, OPEC is Saudi Arabia as it is the only country with a significant spare production capacity that can influence prices.
So when Saudi Arabia decided in 2014 not to do anything and let the market correct itself, the market went into turmoil. And when Saudi Arabia sought its goals only and increased production and capacity between the end of 2014 and the end of 2016 to gain more market share, the market was flooded with oil.
It is hard for any country or producer to compete with Saudi Arabia with its vast reserves and the lowest production cost per barrel of oil.
Of course, not only Saudi Arabia increased production at the time but Iraq, the UAE, Iran and some others did the same and inventories globally were filled with cheap OPEC crude.