As oil prices head North of $80 per barrel, is OPEC relevant once again?

For a number of years and at least from 2014 when oil prices began to slide from $115 per barrel to below $30 in early 2016, many experts and business journals began to question the relevance of OPEC.

OPEC stood powerless for three years until it forged a price cut agreement with Russia and others in January 2017. In May 2018 the price of crude oil has touched $80 a barrel and is expected to rise due to geopolitical uncertainty and the continuation of the price cut agreement. The oil price has risen 51 percent in the last year, driven by coordinated supply cuts and, this month, by concern over Iranian supply after the United States said it would re-trigger sanctions on Tehran over its nuclear activities.

Global demand for oil is likely to be stable this year, as the price of crude nears $80 a barrel and many key importing nations no longer offer consumers generous fuel subsidies, the International Energy Agency said on Wednesday.

The Paris-based IEA cut its forecast for global demand growth to 1.4 million barrels per day for 2018, from a previous estimate of 1.5 million bpd. Speculators and experts predict that prices could rise to $100 per barrel this year and then suddenly the focus is now on what OPEC says and does. So OPEC is relevant again.

OPEC BASHING BY TRUMP AND THE MEDIA

OPEC was created in 1960, based on principles that include the coordination of the Member Countries’ oil policies, so as: to ensure price stability in the world oil market; to obtain a stable revenue for oil-producing nations; and to provide a regular, reliable, efficient and economic supply to consuming countries and a fair return to investors in the oil industry. These are OPEC’s own words in brief.

OPEC’s activities are focused on oil, a commodity that has contributed more than any other form of energy to economic development around the world, over the past century and a half. Analysts agree that hydrocarbons will remain the source of energy for many years to come.

For three years, the Organization of the Petroleum Exporting Countries has appeared powerless to stop a slide in prices that has punished the economies of oil-dependent members, including Saudi Arabia. Such a state of affairs calls into question whether the once-powerful cartel is still a relevant force in today’s market.

The Wall Street Journal reported in November 2016 that OPEC appeared powerless to stop a slide in prices that has punished the economies of oil-dependent members, including Saudi Arabia.

Recently the American President Donald Trump tweeted this: “With record amounts of Oil all over the place, including the fully loaded ships at sea. Oil prices are artificially Very High! No good and will not be accepted!”

It was unclear what triggered the tweet, which is Trump’s first mention of OPEC on social media during his term.

U.S. oil prices are near a three-year high, at close to $80 a barrel, and have been rising since OPEC and non-OPEC producers including Russia cut supply in January 2017 to end a global oil glut and price collapse.

Just over two years ago the US crude oil benchmark (WTI, Western Texas Intermediate) was selling at around $40 per barrel.

THE OIL MARKETS HAVE IGNORED TRUMP’S TWEET

Trump’s tweet came shortly after officials from top oil exporter Saudi Arabia said they would like to see prices climb even higher and that they were still far from their goal of ending the supply glut. Trump cannot pressure Saudi Arabia to increase production to keep the prices low. Saudi Arabia seeks to maximize the value of Aramco before the long-expected IPO on the international stock exchanges in 2019. Saudi Arabia needs the revenue to fund its war in Yemen and to implement its 2030 Vision and so on.

The classic law of supply and demand is back in force with OPEC’s star rising again, Trump cannot influence energy markets by tweeting. The American shale oil production is its peak but cannot expand too much due to bottlenecks and lack of infrastructure. There isn’t enough pipeline capacity. Irwin Seltzer the American business adviser writing in the Sunday Times recently asks: Where are the frackers? Why don’t they open the valves and flood the market? Stelzer answers his own question by saying: “Because they are constrained by the shortage of pipeline capacity in West Texas that is preventing them from moving oil from wellhead to market.”

Prices were declining rapidly in the second half of 2014 under former Saudi oil minister Ali Al-Naimi who made it clear that Saudi Arabia wouldn’t act to prop up prices without broad and meaningful support that went beyond the members of OPEC. According to the London Financial Times; Russia stepped up to provide it, leading a contingent of 11 countries from outside the group to join the agreement, even if it and Oman were the only ones to offer significant cuts that went beyond naturally declining output.

For Moscow, the deal has always been about much more than just oil. Russia’s annexation of Crimea in 2014 generated a threat of international isolation that still casts a shadow over its global strategy. Countering that threat means continuing to convince the world that it won’t be left out of the big global issues.

WHY ARE OIL PRICES GOING UP?

The main factors helping to keep prices well above $70 are geopolitical risks. The International Energy Agency IEA reported last week that the crude oil stocks are at their lowest levels in three years.

Venezuela, for example, has lost more than a third of its oil production amid an economic and political crisis. Down from 2.5 million barrel a day to 1.5 million barrels. Instability and security risks are hampering the full restoration of production in Nigeria and Libya. President Trump has declared the US withdrawal from the Iran Nuclear Deal and threated to re-impose crippling sanctions against Iran oil and banking sectors. That would mean Iran’s export would fall by more than 700,000 barrels per day.

This dramatic development, according to Bloomberg gives headroom for individual producers to pump more while the group as a whole stays within its self-imposed limit. For now, though, neither Russia nor Saudi Arabia has stepped in to make up for the unexpected loss of Venezuelan oil. Far from seeking an exit from the deal, the talk has been of changing the measure of success to justify its continuation.

Both the Saudi and Russian Oil ministers Khalid Al-Falih and Alexander Novak are meeting in St Petersburg this week to discuss the response to rising oil prices. But as oil prices continue to nudge $80 a barrel don’t expect Russia to give up its political gains and lead a charge for the exit. However according to media reports; while scaling back the supply caps is “on the table,” no decision has been made, Saudi Arabian Energy Minister Khalid Al-Falih said in an interview early Friday (25th May) in St. Petersburg. The Organization of Petroleum Exporting Countries (OPEC) and its partners will in June discuss loosening the curbs that began in 2017, Russian counterpart Alexander Novak said at the same interview after a meeting between the two officials.

OPEC is back in business.

Nehad Ismail

Nehad Ismail is a journalist based in the United Kingdom. He writes on the economic issues particularly oil and gas. He has a special interest in the Middle East. He worked 15 years in the oil industry and 6 years in the media. He worked in a newspaper and in a TV channel presenting a political program between 2005 and 2010 (Arab News Network). His articles appeared in many esteemed media. He reviewed more than 12 books.
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