OPEC+: Micawberism in the Middle East
Summary: decisions made at and around the 2 June OPEC+ meeting
are consistent with the decline in the cartel’s ability to determine the
oil price.
We thank our regular contributor Alastair Newton for today’s
newsletter. Alastair worked as a professional political analyst in the
City of London from 2005 to 2015. Before that he spent 20 years as a
career diplomat with the British Diplomatic Service. In 2015 he
co-founded and is a director of Alavan Business Advisory Ltd. You can
find Alastair’s latest AD podcast, Oil: the long good-bye here.
[OPEC+] can’t let rip but lacks the
means to manage a well-supplied market without getting stuck in an
endless series of irreversible cuts.
Camilla Palladino/Lex, Financial Times, 4 June 2024
There are two different ways of looking at the 2 June OPEC+ meeting.
Charitably, its conclusions could reasonably be labelled pragmatic.
However, one could equally view the event on the whole as a cop out.
First, the format of what was the meeting was not what had been
expected. It had originally been scheduled to bring ministers together
in Vienna. However, at what was more or less the last minute it became a
virtual meeting with the exception of the seven big producers whose
ministers were ‘invited’ to Riyadh to a pre-meeting with
Saudi energy minister Abdulaziz bin Salman. One could see this as a
means to impose a Saudi diktat; but one would have to qualify such by
wondering why, for the bulk of cartel members, it had to be done at a
distance.
Second, even though the Saudis had reportedly seen at least one draft
in advance, the timing of the meeting was odd in that independent
reports from three consultants which are supposed to provide the basis
for setting 2025 quotas are not expected until the end of June. As the
cartel is now not due to meet again until 1 December, this smacks of a
desire to duck what is likely to be an even more acrimonious debate on
quotas than we saw in 2023. Furthermore, exempting the UAE alone from
the current quotas by allowing it gradually to increase its baseline by
300,000bpd through 2025 was surely driven purely by the need to avoid
reigniting the only partly resolved 2021 row which, next time, could see Abu Dhabi quit the cartel.
As for the decision to extend all the cuts in output which have been
implemented since November 2022 and which now total six million barrels
per day (bpd), although this certainly reflects the prevailing market
reality, it is also something of a mirage. According to the Economist (writing on 27 May):
Part of the reason why OPEC is failing to boost prices is because
its members are failing to stick to their output targets. …the cartel
is now overproducing so much that its daily output in 2024 is little
changed from the last quarter of 2023…. Since [the second round of
‘voluntary’ cuts in January] the cartel and its partners have overshot
their target every month. In April the excess neared half a million b/d —
a level last seen three years ago.
Worse still, the quota busters include the voluntary cutters —
possibly even Saudi Arabia itself — who in April pumped over 800,000bpd
above their collective target, i.e. over one-third of the 2.2mbpd of
additional cuts introduced in January and now extended through to the
end of September. There is no reason to suppose that self-discipline is
about to improve; indeed, quite the contrary.
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