OPEC+ in rough waters
OPEC+ relations have become fractious through the coronavirus pandemic, and the inequalities between richer and poorer members could increase
Herman Wang S&P
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The boat had been chartered for a gala dinner cruise on the Danube River to commemorate the three-year anniversary of the alliance between OPEC, Russia and nine other key oil producers. But as it waited at the dock, the guests of honor were inside the OPEC secretariat in central Vienna, locked in a pitched and chaotic battle over how to divvy up production quotas.
It was December 5, 2019 — weeks before COVID-19 would enter the world’s consciousness — and OPEC ministers had been quarreling all day. OPEC and its allies were planning to deepen their output cuts by almost half, to 1.7 million b/d, to head off what many forecasters had said would be a weak market ahead, with a potential global recession looming. But who should cut how much was proving contentious.
Before the meeting even started, Ecuador had already announced its intent to quit the organization.
’s delegation walked out of the meeting at one point, unwilling to shoulder an extra cut, sources involved in the talks said. Iraq was also playing hardball on accepting additional supply curbs.
Saudi Arabia, OPEC’s de facto leader as its largest member by far, threatened to flood the market and tank oil prices if members did not commit to tighter compliance — an ultimatum that did not go over well, the sources said.
Oil prices whipsawed as each twist and turn in the negotiations was leaked — sometimes strategically — to the media. As the clock turned to 8 pm, then 9 pm and then 10 pm, a scheduled post-meeting news conference was called off. Around 11 pm, the ministers finally threw in the towel for the evening. The gala dinner boat cruise was also canceled — a sunk cost, as it were. Nobody was in a mood to celebrate, and there was still work to be done.
After some overnight diplomacy, with ministers holding bilateral and multilateral meetings in their hotels, the group, joined by Russia and the other allies, managed at long last to clinch an agreement the next day. The production cuts would indeed go to 1.7 million b/d, and to seal the deal, Saudi Arabia pledged an additional voluntary 400,000 b/d cut.
Ministers left Vienna relieved but still smarting from their battles, as the unity of OPEC had been shaken to its core.
Saudi energy minister Prince Abdulaziz bin Salman put on a brave face, telling reporters that however messy the process, the end-result would still ensure the OPEC+ alliance’s stewardship of the market.
“In all our deliberations, we all try to figure out not only what to do, but what to do in a convincing way that ... not only assures the objective analysts, but also the cynical analysts, that we’re doing our job properly,” he said.
Rocking the boat
These days, like many offices around the world, the OPEC secretariat is a quieter place. The onset of the pandemic has forced the producer group’s headquarters to close at times to comply with COVID-19 restrictions in the Austrian capital. Even now, only some of the staff have returned to working there.
The relative calm belies what has been one of OPEC’s most tumultuous periods, as the bloc and its partners have lurched from existential crisis to existential crisis over the last two years, forced to convene nearly monthly — every time online — to try and control an oil market grappling with a pandemic that has upended the world. That fractious December 2019 meeting was just a harbinger of what was to come.
Three and a half weeks after the meeting, on the last day of 2019, Wuhan authorities alerted the world to a viral outbreak in the city. As COVID-19 infections exploded across the world, an early-March 2020 spat between Saudi Arabia and Russia on whether to expand the group’s production cuts blew up into an all-out price war, with every country pumping at will.
Crude indexes went into freefall; NYMEX futures even went negative.
Chastened by the market meltdown, OPEC+ ministers reconvened in April 2020, and this time they agreed to slash an historic 9.7 million b/d of production — almost 10% of the pre-pandemic market.
The alliance has been gradually rolling back the cuts since the summer of 2020 as the global economy has emerged from the depths of the pandemic, but it has not been smooth sailing.
Mexico quit the agreement that June. Quota compliance by the likes of Russia, Iraq, Kazakhstan and Nigeria has often been lackluster, drawing the ire of other members.
At various points, Russia and the UAE have pushed to accelerate the cuts’ tapering, encountering stiff resistance from a cautious Saudi Arabia, which has sometimes resorted to unilateral extra cuts to keep propping up the market. A reluctant OPEC ally motivated more by geopolitical interests than straight oil price needs, Russia, particularly its largest oil company Rosneft, has constantly chafed at its production quotas.
As for the UAE, it has even internally debated whether OPEC membership remains in its long-term interests, sources have told S&P Global Platts. Emirati officials have since declared the country’s commitment to the organization after it won a higher production quota that starts in mid-2022, following weeks of protracted and heated negotiations in July.
More recently, as a gas supply crunch has spilled over into the oil market, leading prices higher, the group has come under heavy pressure from key consumers - the US, India and Japan - to not overtighten supplies and derail the pandemic recovery. Their requests for more oil have been rebuffed so far.
Some OPEC+ meetings have dragged on for days, others have been abruptly canceled and rescheduled, as ministers clash over their competing priorities. Each time, however, the 23 OPEC+ countries have managed to eventually agree on how to set their production quotas, balancing various members’ eagerness to chase market share with others’ desire to support prices. They have largely successfully overseen an orderly return of crude production, while keeping just enough uncertainty in the market to keep US shale rivals at bay.
After the group’s July meeting, Prince Abdulaziz said OPEC+ affairs always involve delicate diplomacy, which he called “an art” best left for closed-door discussions. But he also warned not to write off the alliance.
“I am a believer of OPEC+,” he said. “OPEC+ is here to stay.”
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