The 14-nation energy cartel, the Organisation of Petroleum Exporting Countries (OPEC), meets later this month (June) celebrating a unique deal that has supported the oil price and given the industry the confidence to invest.
OPEC’s December 2016 agreement with ten non-members to limit oil production and co-operate in other ways has ended what had been a savage downturn in the price of crude on world markets.
The Declaration of Co-operation was designed, said OPEC, to “accelerate the stabilisation of the global oil market through voluntary production adjustments, which amounted to approximately 1.8 million barrels a day”.
World oil production is about 99 million barrels a day, thus the deal cut 1.82% out of crude output. While that may not sound a lot, the balance between supply and demand is very close, meaning even quite small changes to production can have a significant effect on the price.
Deal “rescued" the oil industry
OPEC members contributed 1.4 million barrels of cuts, while the non-OPEC countries reduced output by 400,000 barrels a day.
The arrangement was originally intended to run from December 2016 to May 2017, but was extended, first, from July 2017 to March 2018 and then to cover the whole of 2018.
With the mid-point of the year drawing closer, the big question at OPEC’s conference in Vienna on 22 June is what will happen in 2019 and beyond. How will the OPEC meeting 2018 decide to go forward?
In what amounts to the OPEC meeting latest news, on 30 May, Mohammad Sanusi Barkindo, Secretary General of OPEC, said the Declaration of Co-operation “rescued the oil industry from its worst downturn and has fundamentally changed the energy landscape”.
He added that “it has reintroduced a long-absent element of stability to the market – there is now far more optimism and confidence in our industry, compared to two years ago”.
Mr Barkindo suggested that the machinery supporting the Declaration of Co-operation could become permanent. “The next critical phase in the whole process is to sustain these accomplishments of market re-balancing, a gradual recovery in investments and the return of confidence in the industry,” he said.
“How will we achieve this? Going forward, through a broader and more institutionalised framework of co-operation based on…core principles of equity, fairness and transparency, we will look into developing metrics and designing mechanisms to help govern against future shocks and extreme volatility in the market.”
A number of factors have buffeted the oil price in recent years. One was a fear of economic slowdown in China, an increasingly-important oil consumer. Another related to the flourishing shale oil industry in the United States, previously thought vulnerable to a price drop but more recently, thanks to technological developments, more resilient to a reduction in revenues.
Concerns of supply shortage
Political shocks such as the Brexit vote, the election of Donald Trump and tensions between the west and Russia have created pressures of their own, as has the, until recently, sluggish economic performance of the euro-zone.
Perhaps ironically, one factor supporting the price has been the prospect of a wider war in the Middle East, with the attendant disruption to oil supplies.
While a semi-permanent extension of the Declaration of Co-operation is welcome news for both oil-producing countries and oil companies, the prospect of relatively high oil prices over the medium term may cause concern in some circles, not least among major oil-consuming economies such as France, Germany, Italy and Japan. Twice during the ten years from 1973, a sharp rise in the oil price tipped the industrial world into recession sparking, at the same time, fierce inflationary pressures.
OPEC has recently stressed that it does not wish to happen again. This may be not least because recession-hit economies consume less oil than previously, and this, in turn, sends the price downwards, as happened in 1985.
In May, the joint OPEC and non-OPEC ministerial monitoring committee overseeing implementation of the agreed measures said it “acknowledged the rising concerns expressed by some importing and consuming countries regarding potential shortages in the global oil market” and has requested a sister-body, the Joint Technical Committee (JTC) “to continue to closely monitor the oil market and to report any fundamental changes”.
For all these reasons, the latest OPEC meeting news will attract close attention.
Not all countries pulling their weight
Previous attempts to enforce OPEC production curbs have been undermined by cheating by certain members on their production quotas in order to get a “free ride” from those countries that observed the output caps. The cartel stated in May that, this time, OPEC and non-OPEC members had achieved “outstanding levels of conformity”.
Indeed, conformity with production curbs overall had reached 152%, meaning the countries concerned had reduced production well beyond what was required in the Declaration of Co-operation. “This demonstrates the commitment of participating countries to the restoration of market stability, which is intended to serve the long term interests of producers, consumers and the global economy,” said the ministerial monitoring committee.
However: “Committee members expressed satisfaction with overall results, but noted that individual country performance was not uniform. They once again highlighted the importance of even performance across all countries.”
OPEC members are Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. The non-OPEC countries involved in the Declaration of Co-operation are Azerbaijan, Bahrain, Brunei Darussalam, Kazakhstan, Malaysia, Mexico, Oman, the Russian Federation, South Sudan and Sudan.