Opec’s no-win situation on oil prices

When Opec+ decided to postpone its easing of production cuts two weeks ago, it was in a no-win situation. Oil prices tumbled on the signal that the organisation was negative on demand – but they would also have dropped had it added oil to the market. 

Opec+ faces challenges from within, from without and from those on the borderline.

The group had agreed in June to begin easing the voluntary cuts of 2.2 million barrels per day made by eight members gradually from October. But its collective cuts of 3.66 million barrels would remain in place until the end of 2025.

On September 5 it changed its mind, postponing the easing of the voluntary cuts for at least two months.

Meanwhile, three members that have been over-producing, Iraq, Russia and Kazakhstan, submitted compensation plans under which they would make up volumetrically for past undercompliance.

Brent crude had fallen from $81 to less than $73 per barrel in the days ahead of the meeting, and it tumbled to just over $69 afterwards – the first time it has been sub-$70 since December 2021. 

Prices have recovered a little since then, helped by the shutdown of some US production by Hurricane Francine, easing US inflation and hopes of a deeper interest rate cut. But the overall economic and demand picture from China remains negative, while the same factors in the US are mixed.

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Plenty of attention has been given to Iraq and to the pressure from non-Opec+ producers, particularly the US, but also Brazil, Canada, new entrant Guyana and even China. Three years of relatively high and unusually stable prices have encouraged investment and strong output growth.

But the “troublesome threesome” within Opec – Iran, Libya and Venezuela – have received less focus. Long-time members of the organisation, they are nevertheless exempt from production cuts because of political and security difficulties and, in the case of Iran and Venezuela, US sanctions.

Libya’s production was almost entirely cut off during 2020 because of the conflict between its eastern and western governments. That surfaced again this August, when the removal of the central bank governor by the Tripoli government sparked another shutdown of its oil terminals. 

It is unclear how long the dispute may last, with conflicting reports of exports restarting, but Opec+ implicitly chose to take the cautious view that Libya will be back soon.

Venezuela’s production has recovered somewhat since 2019, helped by US sanctions waivers. But its transparently fraudulent presidential election in July is likely to lead to a return of restrictions.

Sanctions have pushed Russia to become a major competitor to the Middle East in the core oil markets of India and China

That leaves Iran, the biggest gainer over this period. In 2019, intensified sanctions by the Trump administration drove its production below 2.4 million barrels per day. In the Covid-19 year of 2020, it dipped below 2 million bpd. 

This year, a relative easing of sanctions enforcement as attention has turned to Russia, combined with more effective evasion measures, led Iranian output to rebound to nearly 3.3 million bpd in August.

Someone has to bear the burden – and that means the core Opec-8, led by Saudi Arabia.

Saudi production was nearly 9.8 million bpd during 2019, soared to 11.55 million bpd during the brief price war in April 2020, but was down to 8.89 million bpd in August. Consequently, it has lost nearly a full percentage point of global market share.

Russian production is also down, mostly because of Opec+ limits, but sanctions have pushed it to become a major competitor to the Middle East in the core oil markets of India and China, while ceding Europe.

Despite rising Indian imports, Iraq and Saudi Arabia have trodden water while the UAE and Kuwait have sunk. Venezuela has also returned moderately as a competitor this year.

Russia moved ahead of Saudi Arabia as a supplier to China in 2022 and still holds the lead. A recent jump in likely Iranian volumes has brought it close to Saudi levels, too.

This presents a problem for the GCC exporters. Saudi Arabia has joint-venture refineries in China that help to defend its market share, while Iranian supplies have probably sated the appetite of the mostly independent refiners who buy them. But Russia has the advantage of supplying some 40 percent of its volumes to China via pipeline.

In India, Iran isn’t a factor but Russia’s Rosneft owns 49 percent of Nayara, a major refiner. Saudi Arabia and the other Gulf oil exporters have no refining presence there.

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There’s not much the quota-bound Opec members can do for now. The stick-and-carrot of postponing production increases may help to wring better compliance out of Iraq. But easing the cuts would have helped accommodate and rationalise the over-production. Even deeper cuts are ruled out since it’s unlikely that Iraq, Russia and others would comply, while Iran would benefit all the more.

The White House will be happy to keep oil prices down ahead of November’s presidential election, which also helps tame inflation. They are unlikely to go more aggressively on sanctions enforcement on Iran, unless an intensified conflict with Israel forces their hand.

But at some point, the core Opec members need to begin climbing back up the slippery pole of market share. Lower prices will deter competitors, help demand to pick up and give more room for interest rate cuts.

More than four years since the steep Covid-induced cuts, the group cannot afford the pursuit of prices that are a little too high to become a lost decade for its growth.

Robin M Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis