OPEC and Russia cut oil output

Saudi Arabia and Russia are on the verge of agreeing on a deal to cut oil production, defying calls from US president Donald Trump to leave the taps open to keep prices low.
This announcement comes after the warm interaction between Russian President Vladimir Putin and Saudi Crown Prince Mohammad Bin Salman at the recently concluded G20 meeting Buenos Aires.

Background

The Organisation of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation of 15 nations, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), and headquartered since 1965 in Vienna, Austria. As of September 2018, the 15 countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world's "proven" oil reserves, giving OPEC a major influence on global oil prices that were previously determined by the so-called "Seven Sisters” grouping of multinational oil companies.

The stated mission of the organisation is to "coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry." The organization is also a significant provider of information about the international oil market.

Economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, but one whose consultations are protected by the doctrine of state immunity under international law.

Analysis

The OPEC oil cartel and allies led by Russia said in Vienna on Wednesday that there was a need to reduce output, responding to the near 30 per cent drop in benchmark crude prices in the past two months. The group, widely known as OPEC+, has not yet decided on how big the supply reduction will be, with Russia dragging its feet over how much it was willing to reduce supply.

“We did not discuss numbers . . . we just agreed on a cut,” said Mohammed Al Rumhy, Oman’s oil minister, although he added that technical analysts had endorsed a reduction of at least 1m barrels a day. He said members of the monitoring committee including Saudi Arabia and Russia “cannot argue with the recommendation”, adding that a decision would be made in the coming days.

Saudi Arabia, the de facto OPEC leader, is also facing unprecedented pressure from the US, its key western ally, with Mr. Trump praising the drop in oil prices as a “tax cut” for the world. Trump has backed Saudi’s Mohammed bin Salman, despite increasing disquiet in Washington over the crown prince’s alleged role in the killing of dissident journalist Jamal Khashoggi.

As energy ministers held a technical meeting in Vienna, Mr. Trump said in a tweet: “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!”

OPEC oil ministers will meet on Thursday to decide on the size of the planned production cut, with many emphasising the need to take action or risk a severe supply glut developing in the coming months. The broader deal with oil producers outside the cartel, including Russia, takes place on Friday.

Failure to reach a deal would probably push oil prices even lower after a fall from a four-year high of above $86 a barrel in early October to just above $60 a barrel in the last week of November 2018. Analysts said the group needed to find a way to reduce output without attracting more ire from the US, which may result in them making a smaller cut than anticipated or fudging the outcome of the meeting.

Saudi Arabia believes a cut of at least 1m barrels per day — an amount roughly equal to 1 per cent of global supply — must be removed from the market to stop a substantial stock build in the first half of next year. The cut could, however, be as high as 1.5m barrels per day, as concerns about oversupply in the market grow.

Assessment

Our assessment is that OPEC+ is looking to suspend the falling oil prices and end volatility in the market. Oil prices have seen unreliable fluctuations ever since the US withdrew from the JCPOA and re-imposed sanctions on Iran. We believe that OPEC and Russia are looking to stabilise the oil prices in the short term by limiting oil production.