Cracks in OPEC Continue to Emerge

At a Glance

  • After announcement to continue OPEC production cuts, WTI crude prices dropped nearly 7 percent
  • The expansion of OPEC+ is critical for the cartel’s survival amidst U.S. production that has grown to over 12.1 million barrels per day

At their July meeting in Vienna, OPEC and OPEC+ decided to continue to operate within the parameters of the 1.2 million barrel per day (bpd) production cut laid out in December 2018. The official press release stated the cuts would continue “for an additional period of nine months from 01 July 2019 to 31 March 2020.” Also noted in the press release was the date of the next OPEC and non-OPEC Ministerial Meeting to be held on December 6, where the cuts will be reviewed and discussed. That basically makes this nine-month extension, a six-month extension.

Pre-Meeting OPEC Watch

The stated intention of production cuts is to balance supply and “stabilize” prices, which is a pleasing way of saying “increase” prices. OPEC+’s supply cuts, were originally put in place as a temporary measure at the beginning of 2017 but they were announced in 2016. Those cuts helped to stop an almost two-year decline in oil prices, and OPEC and its oil producing allies have renewed or extended production cuts repeatedly since then. Prior to the announcement the CME OPEC Watch Tool had the probability of maintaining production cuts at only 5 percent. That was a window into the market’s potential disappointment when the extension announcement came on July 2.

Post announcement, WTI crude prices fell from an initial spike high of $60.28 in the August contract to $56.09, a decline of almost 7 percent in less than 24 hours. That was certainly not the outcome OPEC members were hoping for, but definitely the outcome that CME crude oil options was predicting given the failure to increase output cuts.

Cracks in OPEC Foundation?

On April 4 we posted a piece where we discussed the declining influence of OPEC on oil prices. In that piece I wrote “While continued cooperation within OPEC+ is all but guaranteed, there is some tension, disagreement and cracks in the foundation of the super-cartel. It seems like at this point, we won’t know if those cracks have been mended until the late June meeting of OPEC+.” It seems as if they have not been mended but have gotten worse, with Iran being the main antagonist.

Iran voiced objections to the strong influence of Saudi Arabia over OPEC decisions, and as cooperation between Saudi Arabia and Russia solidifies, that influence becomes stronger.  OPEC alone controls less than 50 percent of the world’s crude oil production, but “OPEC+,” controls a majority, which is critical for the cartels survival amidst U.S. production that has grown to over 12.1 million barrels per day.

A New Charter

At the meeting in Vienna, OPEC agreed to formally recognize the new relationship with its non-OPEC allies through a “Charter of Cooperation.” The charter only needs to be approved by Russia and the other OPEC+ members, but Iran threatened to use its veto power to derail the formal agreement of cooperation. It ultimately acquiesced, but the tension remains, in part due to Saudi Arabia and the UAE’s support for American economic sanctions levied against Iran.

Saudi Arabia’s minister of energy, Khalid al-Falih, called the charter a “historic document.” While adding “We are bringing a group of producers permanently into a bigger fence … to sort of work together as a bigger family.” The charter, however, is not universally loved by the rest of OPEC, given the power displayed by Saudi Arabia and Russia by implying an extension has been agreed upon prior to commencement of the meeting. “Who needs an OPEC meeting?” one irritated OPEC delegate said.

The power of the new official OPEC+ is definitely real, but there are two new pipelines due to come online in west in 2020, cutting cost of delivery for the U.S. shale patch. That along with Iranian tensions both within OPEC and on the world stage continues to shine a light on the decline of OPEC influence on global oil prices.

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