Opec+ treads fine line between oil markets and geopolitics

Reuters

When OPEC+, the alliance of the 13 OPEC and 10 friendly nations, led by Russia, on Monday announced it was cutting production by 100,000 barrels per day it had symbolic rather than material significance.

One hundred thousand bpd is a tiny amount given that global consumption is around 100 million bpd. However, it signals the intention of OPEC+ to take charge of market dynamics.

The price of crude had dropped 25 percent since its highs in March after Russia had invaded the Ukraine.

Worse, volatility was so high, despite a fundamentally undersupplied market, that it prompted Saudi energy minister Prince Abdulaziz bin Salman to warn two weeks prior to the September 5 meeting that production cuts could be on the cards. 

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His concern was that the futures markets did not reflect fundamentals and that volatility was too high.

The prince has a track record of following words with action and indeed we saw a production cut on September 5. This was much against what most analysts had predicted. So, what is behind this decision?

Global oil markets are still undersupplied, but, at the same time, the global macroeconomic outlook has worsened.

In July the IMF entitled its economic forecast as “gloomy and more uncertain”, downgrading it by 0.4 percent to 3.2 percent for this year. 

Since then the energy crisis engulfing Europe, renewed lockdowns in China and inflation rates not seen in 40 years gave rise to concerns on the demand side.

On the supply side, Saudi Arabia, the UAE and Libya upped production close to 600,000 bpd in August. 

However, political strife in Iraq and Libya put a question mark over production levels going forward and the P5+1 negotiations for a nuclear deal with Iran have yet to reach a conclusion. 

In other words, the outlook until the end of this year is less than certain and 2023 looks grim, if the energy crisis in Europe and global inflation fears don’t abate.

In that sense, OPEC+ erred on the side of caution in making a symbolic move which proved that the alliance means business when it comes to managing oil markets – or, in OPEC speak, ensuring markets are adequately supplied. 

It is a point in case that the September 5 press release stated that the meeting requested that “the chairman consider calling for an OPEC and non-OPEC ministerial meeting anytime to address market developments, if necessary.” 

There are larger geopolitical considerations behind both the decision last month to increase production by 100,000 bpd for September and the one reducing it by that amount for the month of October.

The alliance looks at macroeconomic developments, but also at G7 and Western moves to take Russian crude out of the market or at least put a price cap on it.

Russia has been a valued member of OPEC+, which is governed by the Declaration of Cooperation since it was set up in 2017. Russia’s officials have lobbied for production cuts for some time. 

In other words, the organisation is right on the faultline of geopolitics where the US, an important ally of GCC nations, asks for more oil on the market and Russia, an important member of the OPEC+ alliance, is on the opposite side of the argument. 

Raising or lowering these targets by 100,000 bpd has no material impact, given that OPEC+ did not reach its production targets by 2.8 million bpd in July, according to S&P Platts. These decisions do, however, send signals of where the organisation stands in terms of geopolitical developments. 

The oil price rose on the announcement with Brent reaching $96.8/b and had come down to $93.2/b by midday Tuesday.

Prince Abdulaziz may have had a point highlighting the volatility in the oil markets after all, which do not reflect the fundamentals of a market which is still undersupplied. 

Cornelia Meyer, business consultant, macro-economist, and CEO of Meyer Resources