Oil Price; Parameters and Players
The 174th OPEC Conference ended despite the backdrop of sharp discrepancies between OPEC members and non-OPEC oil producers engaged in a production cut deal to shore up prices.
Some nations like Russia and Saudi Arabia favored gradual rise in oil production while Iran, Iraq, Venezuela and Algeria were against any output hike.
Despite such differences between oil producers, they shared one major concern; oil price. One group favored production hike for the maintenance of current prices, while another group linked price stability to output rollover.
Add to these, political motivations like discrepancies between OPEC member states and the US influence.
In light of the impact of OPEC decisions on global oil markets, a review of aspects of OPEC and non-OPEC agreement would project an image of prospective oil prices.
Different Motivations
OPEC members along with non-OPEC allies had decided in the November 30, 2016 meeting to cut their combined output to 32.5 mb/d. This decision took effect on 1 January 2017, which was extended during next meetings. Owing to this agreement over the past 18 months, energy markets reached stability and oil prices went from $27 per barrel in 2016 to about $80 per barrel in 2018.
From the very beginning, the main objective of this project was to bring oil prices back to their genuine levels. That is why some countries were expected to remove obstacles to production enhancement, as soon as prices go upward. This issue was the main topic of the 174th OPEC meeting.
Saudi Arabia, OPEC's largest oil exporter, and Russia, world's largest oil producer, were unanimous on leaving the production cut agreement gradually. Of course, each of them were pursuing their own objectives by offering to increase output.
Russia is seeking more benefits in order to fix its domestic economy. The Russians believe that limiting supply for a long period may encourage the Americans, who are not party to the agreement, to boost domestic production. In the meantime, the Saudis are trying to follow US schemes for reducing energy prices and supplanting Iran's oil in the market after sanctions take effect on Tehran.
The US's decision to re-impose sanctions on Iran following its withdrawal from the 2015 nuclear deal means Iran would be denied any share of oil production hike. That would please Saudi Arabia which is locked in a regional rivalry with Iran.
US Role
Since Richard Nixon's term onward, all US presidents have failed to make good on their promise of energy self-sufficiency in the country. Such promise has always been backed by public opinion and both Democrats and Republicans. However, gas price hike in recent months due to oil price growth in global markets has posed a serious challenge to the Trump administration's policy of self-sufficiency in the energy sector. Furthermore, it has rendered other popular measures particularly tax exemptions, which proved to be ineffective, because although the US has increased its domestic oil production it relies on imports for about 40% of its oil consumption, which makes up 20% of its trade balance deficit. Therefore, energy price hikes which are threatening the revival of US economy in the Trump administration may significantly affect the November 2018 midterm elections in the United States. That is why the US government is worried about the negative impact of gasoline prices on domestic political developments, and undertook serious efforts to influence the OPEC ministerial meeting's outcome in favor of oil output increase.
While President Donald Trump was hopeful that OPEC would significantly increase its oil production in order to keep prices low, some member states like Saudi Arabia were acting as US proxy in the group. However, the US failed to achieve its goals within OPEC, because the final agreement required full compliance with the agreement achieved in 2016. That was much below what such big consumers as China and the US expected from OPEC to help drive prices down.
Prices Up or Down
OPEC and non-OPEC oil producers are faced with myriad challenges in deciding to increase output because any upward change in daily production would be reserved to states which are able to lift their output. Most OPEC and non-OPEC producers like Venezuela, Mexico, Angola, Azerbaijan, Algeria, Iraq, South Sudan, Gabon and Equatorial Guinea could never raise their output; therefore, the genuine increase in production will be much less than expected. Although no quota has been set for different countries in output hike, it seems that Saudi Arabia would raise its output by 245,000 b/d, Russia 160,000 b/d, Kuwait 80,000 b/d, Oman 35,000 b/d and the United Arab Emirates 80,000 b/d.
If during the months leading to the adoption of this decision by OPEC, some nations like Saudi Arabia had violated this agreement and supplied more oil on the market some countries like Venezuela and Algeria were experiencing sharp drop in oil production. Therefore, the combined OPEC and non-OPEC output was still below the ceiling agreed upon by the producers.
Therefore, if the countries' compliance to oil production cut exceeded 100%, in some cases the total output would be respected. Under such circumstances, the new OPEC-non-OPEC decision could only supply an extra 400,000 to 600,000 b/d on the market, which would not be sufficient to replace Iran's oil when US sanctions come into effect. That would even affect global energy prices.
Even in case 1 mb/d is produced and exported, this figure will be 800,000 b/d below the 2016 agreed upon ceiling and could not bring back conditions to the time before 1.8 mb/d had been cut from oil supply.
Meantime, demand has exceeded the annual growth rate of 1.5% over the past two years and global oil consumption is largely expected to reach 100 mb/d this year. The issue indicates that the oil production ceiling set in the OPEC and non-OPEC agreement could not fill voids which currently exist in the market.