With OPEC’s global market share losing to non-OPEC producers – including the US shale production which since 2009 has been persistently undermining global oil deal epitomised by the oil cartel – broader arrangements seem inevitable if the Saudi-led bloc aims at rebalancing the market.
The heat was in the air prior to the meeting of the Organization for Petroleum Exporting Countries (OPEC) in Vienna sending waves across the commodity markets. The price of oil tumbled 4 percent as there were doubts prior to the meeting over the final outcome. Yet, the cost of a barrel surged 10 percent as the meeting on the 30th of November was coming to an end and it became clear crude production cuts were agreed on.
The allocated output adjustments agreed on by the 14 country-strong cartel produced a final figure slightly over 1.2 million barrels of oil per day (mboa) of production cuts. To be sure, it is the first time a deal of this kind has been agreed by the bloc since 2008 and is a remarkable development at least on paper. A closer look at the adjustments numbers, however, is revealing. The bulk of the production cuts has been taken on by the Saudis (0.486 mboa) followed by Iraq (0.210 mboa), UAE (0.139 mboa) and Kuwait (0.131 mboa). As is the case with the type of agreements, politics has featured prominently.
Comments by some representatives during the negotiations had, indeed, produced more evidence of differences within the bloc, a narrative that has accompanied OPEC’s brand for some time. Being responsible for nearly one-third of global output OPEC has relied on its most potent member, Saudi Arabia, to broker a large deal of this kind. The essence of OPEC decision and its final outcome could not be achieved without suspense and tension. With Indonesia’s membership in the organisation reportedly suspended in the aftermath of negotiations while Nigeria and Libya receiving special concessions – the ‘to-be-or-not-to-be’ of the deal depends ultimately on the Kingdom and the arrangements the bloc's key states need to make to reduce the current oil glut.
OPEC as First Victim of Price Wars
"The underpricing of oil by Iran is a typical attempt to enter new markets", Bochkarev said. "Iranian oil left the European market after the European Union joined the sanctions against Iran in 2012, and it was replaced by Russian or Saudi oil. As it tries to return to the traditional markets, Tehran is, of course, forced to cut prices to attract buyers. "
Reintegration of Iran into international energy arena after lifting of the sanctions has produced a new dynamic within OPEC. The aftermath of the Vienna negotiations – with Iran allowed to boost its crude production slightly to compensate for the loss of the market under the sanctions – only reinforces the rivalry between Tehran and Riyadh. The Islamic Republic leaves the negotiation room with a net increase in its oil production and it is likely to be seen as its major victory adding to tensions.
Yet, with OPEC’s global market share losing to non-OPEC producers – including the US shale production which since 2009 have been persistently undermining global oil deal epitomised by the oil cartel – broader arrangements seem inevitable if the Saudi-led bloc aims at rebalancing the market. Saudi Arabia's counterheavyweight on the global stage, Russia, which is outside the club has been subject to increased overtures from the bloc. Russia’s Energy Minister Alexander Novak confirmed upon OPEC’s reaching of the final deal that gradual output cut of up to 0.3 mboa would follow to rebalance the oil price. Moscow’s move has emboldened Kazakhstan and Azerbaijan to allude to a possibility of production adjustments of their own to achieve a concerted approach to what the producers see as the market in need for rebalancing.
The non-OPEC producers link their actions to compliance over the agreed adjustments. The proof is in the pudding, though – what most commentators emphasise is the degree to which compliance with the deal is consistent throughout the Organisation. The deal does not necessarily mean production cuts which, in turn, does not trigger non-OPEC production reduction. While OPEC and non-OPEC producers’ talks will follow later on in December verification of the compliance will be OPEC’s next meeting with crude production will be closely monitored ahead of the next meeting of the group on 25 May 2017.