The 173rd meeting of the Organisation of Petroleum Exporting Countries (OPEC) – held on 30 November 2017 in Vienna – announced that the production target would remain at a level of 32.5 million barrels of oil per day, which will be in place at least until the end of 2018. Aimed at depleting global oil inventories and rebalancing the market the target announcement is a result of a carefully-planned strategy that, in addition to Saudi-led OPEC includes non-OPEC producers – most notably Russia – who agreed to extend production cuts into 2018. The 173rd meeting resulted in a broader arrangement that included 24 nations controlling roughly 60 percent of production globally agreeing to production cuts of 1.8m barrels of oil per day up until the end of 2018. Compliance with the production cuts as well as the duration of the cuts are key determinants in achieving the aims of the arrangement.
OPEC’s power to control the oil market has been waning amid changing dynamics in the market which include the already well-established US shale production. Revolutionary unconventional production supplemented by geopolitical developments in the oil producing regions (including but not limited to the Saudi – Iran rivalry) and, last but not least Russia’s high production in 2017 have all changed the oil market, significantly undermining OPEC’s traditional role. Difficulties with reaching agreements on production quotas in the last few years have resulted in a departure from the organisation’s ‘business as usual’, members-only production cuts commitments. As the author of this article argued in a previous op-ed broader arrangements seem inevitable if the Saudi-led OPEC aims at rebalancing the market. The last meeting of OPEC confirms just that: Saudi-led OPEC’s power to control the oil price is waning and necessitates moving towards broader production cuts arrangements which include key non-OPEC producers. The process of engaging with non-OPEC producing nations started at the end of 2016 when Russia as well as Kazakhstan, Azerbaijan, Oman and Bahrain all joined the negotiations. Such broader formats are likely to continue, driven not only by market rationale but also geopolitical and security considerations.
As with previous production cut deals compliance will ultimately depend on Saudi Arabia who hinted at the possibility of even going an extra mile and cutting production beyond its agreed level. Russia’s involvement – preconditioned with high-level political talks earlier this year and, at the same time the first ever visit of the Saudi monarch to Russia in October 2017 – all of which brings a new dimension to OPEC. The oil price has remained unshaken in the aftermath of the arrangement which is likely to the fact that a production deal must have been anticipated and ‘factored in’ to the market following Saudi King Salman bin Abdulaziz’s visit to Moscow.
OPEC’s broader arrangement will depend on compliance with the pledges made by individual countries and application of the production quotas for an extended period of time. Commitment to the agreed production target – in particular, on Saudi and Russia’s part due to the two countries’ production capacities – marks a steady decline of the Organisation. Short of a new institutional makeup (Russia had previously declined to join OPEC) the broader arrangement can be seen as tactically convenient. Yet, if uninterrupted the broader arrangement provides for a new role for Russia as an indispensable decision-maker in global oil.