Opec+ weighs which cards to play as options narrow  

Alamy via Reuters

The oil experts dug deep into the book of cliches in reaction to the postponement of a planned restoration of Opec+ supply.

The oil alliance led by Saudi Arabia and Russia put off until December the scheduled return of 180,000 barrels a day, the first part of a detailed programme of crude increases over the next year, in the face of demand and price weakness.

“Kicking the can down an uphill road,” was one reaction; “painting themselves into a corner” another, along with “between a rock and a hard place”.

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The consensus is that Opec+ has played most of its cards and is now caught in a spiral of cuts and price falls that are self-reinforcing in an over-supplied market, and ultimately detrimental to the economies of the countries that comprise the 22-member alliance.

There is also the question of damage to the credibility of the grouping. Postponing implementation of a carefully thought-through strategy, even though it allowed itself wiggle room by saying it all depended on market conditions, is not the best look.

The Opec+ overproduction problem

Some within the organisation point to the overproduction by three of its most important members – Iraq, Russia and Kazakhstan – as a big reason why the world is apparently awash with crude.

Overproduction has been an ongoing fly in the ointment for Opec+ ever since big cuts in 2020 averted the pandemic-related oil crisis. Despite many attempts to build a compensation structure to deal with it, the problem persists.

That is a challenge for the future. The immediate issue for Opec+ is to decide what to do in December to break out of the cycle and set strategy for the year ahead.

James Swanston, Mena economist for the London-based Capital Economics consultancy, neatly summed up the options in a recent research note.

Option 1 for Opec+ is to deepen oil production cuts to remove more barrels from the market.

This would almost certainly have an instant effect on crude prices, but whether that would be enough to compensate for the lost volume is by no means certain.

To have the desired effect of raising revenue – Saudi Arabia’s apparent aim – prices would have to hit $100 a barrel, Swanston argues. That is unlikely without a drastic ratcheting up of tensions in the Gulf.

I would argue that there is a sub-option here too, in which the current cuts – 2.2 million barrels in total – are simply rolled over until market conditions are deemed suitable for Opec+ to return them.

Swanston’s Option 2 is to stick to the plan to unwind cuts from December and to gradually return the 2.2 million barrels next year, and hope that increased volumes compensate for any price weakness.

But there is no certainty that the price uptick would be enough to guarantee increased revenue. It would probably need a price of $85 per barrel – unlikely given weak Asian demand and projected oil surpluses in 2025.

Option 3 is the bazooka – to flood the market with crude in the expectation of winning back market share and force higher-cost competitors (mainly US shale producers) out of the market.

Saudi Arabia has declared “oil war” twice in recent history.

First, in the period up to 2016 when the kingdom and Opec tried to squeeze US competition from global markets. This proved ultimately untenable and led directly to the creation of Opec+ when Russia was brought into the tent.

The second was the brief period in 2020 when Saudi Arabia lost patience with Russian foot-dragging over the need for pandemic-related cuts.

After a brief crude supply blitzkrieg, Russia waved the white flag and got back into line – a surrender that still rankles among some in Moscow.

So, flooding the market has had a mixed track record.

The other problem with an “oil war” strategy is that the market has changed dramatically since 2020, mainly because of the war in Ukraine. Russian oil flows now go east, rather than west, eating into the market share of Arabian Gulf countries.

In this scenario, flooding the market would effectively be a declaration of war among the partners in Opec+ in the battle for Chinese, Indian and South East Asian market share.

It is hard to imagine the organisation surviving such an outbreak of hostilities, which would plunge the world into an oil free-for-all.

The odds are still against this apocalyptic scenario, but the possibility is increasingly significant. 

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE