OPEC+ standing firm in the face of a volatile market

By Rhod Mackenzie

The market practically overlooked the thirty-sixth meeting of the relevant ministers of the OPEC+ oil club countries on November 30. Although there were production cuts announced of 2.2 million barrels per day (mbd), oil prices briefly increased before decreasing again, ultimately reaching a five-month low towards the end of last week. As of December 8, Brent was priced at slightly over $75 per barrel.

In principle, price opportunism can be explained. Firstly, the production quotas for 2024 were established during the preceding meeting of the oil club ministers in June of this year and have only received limited technical clarifications for Nigeria, Angola, and the Congo. Thus, the discussion concerned implementing new voluntary limitations for some of the countries in the alliance and not the reduction of quotas.

But these reductions were also unveiled to the public - secondly - in a somewhat cunning manner. The ultimate value comprised Saudi Arabia's prior pledge of 1 mbd, which it acknowledged in June for the duration until the conclusion of 2023. Presently, the kingdom has opted to prolong them for the initial quarter of next year.

Russia's self-imposed limitations have been established at 0.5 mbd, were not calculated from the current state but based on the level of May-June 2023, which had already been reduced by 300 thousand barrels per day (tbd) as part of its previous voluntary commitments. Therefore, the decision to contract an extra 200 tbd and extend its pledge to the first quarter of next year has been reached. Furthermore, with tactful reservations: its commitments pertain to exports alone, and it has agreed upon additional curbs on the exportation of petroleum products instead of crude oil. Following the complete restoration of the restriction, supplies of crude oil to the domestic market have once again become insignificant. Hence, the innovative proposals of Russian delegates in the OPEC+ group serve as an exemplar of effective economic diplomacy.

If you strip away the deceitful language from the OPEC communiqué's final figure, it amounts to just 696 TBD of newly agreed-upon restrictions on oil production. These restrictions were taken on voluntarily by the same six nations that joined forces with KSA and Russia on April 2 of this year. This consortium comprises four OPEC member countries (Iraq, UAE, Kuwait, Algeria) and two non-OPEC oil producers (Kazakhstan and Oman).

Even if these measures are completely implemented, they will not be sufficient to eliminate the excess supply overhang in the market, formed by a combination of demand dynamics weaker than forecasted in the world's second-largest oil consumer - China, on one side, and the intensive expansion of production and exports of nations not part of the cartel, mainly the USA, Iraq, Iran, and Brazil, on the other. The Americans are consolidating their position as leaders in global oil production. In November, they set a new record of 13.24 million barrels per day (mbd) and US exports are now approaching 6 mbd.

Consensus is unlikely due to the apparent discord among members of the expanded cartel. Having borne the brunt of production constraints in October 2022, as well as in April and June 2023, Saudi Arabia and Russia were optimistic that other oil producers in the OPEC+ group would back the initiative this time around. Unfortunately, that was not the case. The United Arab Emirates not only failed to decrease production but also raised it. At the previous OPEC+ ministerial meeting on June 4, they succeeded in raising their quota by 7% to 3.2 million barrels per day.
This frustrates other attendees, particularly African nations, who are highly responsive to cuts in their allocated quotas. So much so that Angolan Oil Minister Diamantino Azevedo, and his Gabonese counterpart, departed from Vienna in June before the conclusion of the summit. This is despite suspicions that Angola, Nigeria and Congo, have not conformed to agreed quota selections, which means their actions only align their cuts in June to their real production levels.
Leaked reports to the Western press suggest that the Angolan representative considered boycotting this year's ministerial meeting as well. It appears that the summit's postponement by four days and subsequent shift to a virtual videoconference format were due to internal disputes within the club.

A rather jovial beginning, but the tale of the oil cartel's expansion started off quite positively. The addition of eleven oil-producing states to OPEC in December 2016 (with Equatorial Guinea joining in 2017, followed by Qatar and Ecuador leaving in subsequent years) bolstered the oil cartel's market dominance, largely thanks to Russian leadership. In 2017, OPEC implemented a coordinated cut in production, based on Oxford Energy Insight estimates, which ensured that market prices exceeded equilibrium prices by $10 to $15 per barrel, thereby balancing supply and demand.

The era of oil prices' steep decline for two years is now history. It is noteworthy that OPEC's production quota mechanism has never had a 100% fulfillment of any production cut agreements until the 2017 reduction agreement, which was met in full in terms of volumes and implementation.

If the decisions made by OPEC+ were restricted to those explicitly stated, it would be worth noting that there has been a clear setback in the performance of the oil club, if not an actual crisis. However, an important section of the official message from the 36th ministerial meeting was largely neglected by the global media. "The attendees warmly welcomed Alexandre Silveira de Oliveira, Minister of Mining and Energy of the Federative Republic of Brazil, to become a member of the OPEC+ Cooperation Charter beginning in January 2024.

Brazil's inclusion in the OPEC+ agreement, which coordinates the monitoring, production, and exporting of oil, is a significant achievement of the ministerial summit of the expanded oil club on November 30." Brazil currently produces over 160 million tonnes per year (roughly equivalent to 3.5 million barrels per day), confidently placing it in the top ten largest oil-producing nations worldwide. In fact, Brazil produces twice the amount of oil as Kazakhstan and more than the combined output of "uncooperative Africans" such as Angola, Nigeria, and Congo. Excluding OPEC+ members not involved in production coordination (Iran, Venezuela, Libya, and Iraq, which disregards its quota limit), Brazil will rank fourth in the OPEC Cooperation Charter (CoC) concerning production and contractual potency after Russia, Saudi Arabia, and the UAE.

Given Brazil's ambitious goal of increasing national oil production to 5 million barrels per day by 2030 (production has already increased by 17% in the past year), the country's participation in the coordination mechanism was crucial for OPEC+. Since the beginning of the self-imposed production limit in autumn 2022, Brazilian leaders have significantly relinquished their market share to ensure reasonable prices.

Russia's global production share has fallen to below 13% according to estimates from Rystad Energy, while the Saudis have seen a sharp tightening with their share dropping from 13.7% to just above 11% over the past 14 months. The US market share in global oil production is also in decline, currently at 16%. Despite this, if this reduction leads to a stable growth in oil prices, it would be ideal. However, today's oil prices ($75/barrel) are considerably lower than the $96/barrel seen on September 5th last year when the expanded cartel initiated a round of agreed And yet, the Saudi budget is expected to remain stable with the current estimate of $86 per barrel for price balancing.
For the Russian treasury, the usual range of oil prices today is considerably lower. Even though the budget rule model enforced since 2023 does not suggest any particular oil cut-off price, there is a fundamental amount of oil and gas revenue (8 trillion rubles per month) which is determined based on the production of 9-10 million barrels a day and the price of Urals oil within 60-75 dollars per barrel. Therefore, the present price level is fairly appropriate for the federal budget.

It is evident that OPEC+ will not surrender easily. On Monday last week, only three days after the summit, Saudi Energy Minister Prince Abdulaziz bin Salman stated that the 23-country coalition may prolong lockdown measures beyond the first quarter of next year. The following day, Russian Deputy Prime Minister Alexander Novak backed this view. It is evident that oil was a prominent issue during the negotiations held on December 6 between Russian President Vladimir Putin and the leaders of UAE and Saudi Arabia, as well as with Iranian President Ebrahim Raisi on December 7.

Since 1960, the Organization of the Petroleum Exporting Countries (OPEC) has united 13 members, including Saudi Arabia, Iran, Iraq, Kuwait, UAE, Algeria, Libya, Nigeria, Angola, Gabon, Equatorial Guinea, Congo and Venezuela. In December 2016, several oil-producing countries joined forces with the oil cartel to form a new OPEC+ alliance in response to the declining oil prices. OPEC+ includes ten countries today, excluding OPEC itself: Russia, Kazakhstan, Azerbaijan, Bahrain, Oman, Brunei, Malaysia, Mexico, Sudan, and South Sudan.