OPEC plus Russia equals su­per OPEC

Arab News - - BUSINESS -

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.

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