The Organization of the Petroleum Exporting Countries, OPEC meets next Thursday November 30 at the Vienna, Austria headquarters to review the extended production freeze that expires in March 2018. Last December, 24 global oil-producing nations agreed to cut output by five percent or 1.8 million barrels a day initially for six months, and by nine months till March 2018. OPEC as a global oil cartel has members’ budget trains in varying degrees dependent on crude sales.
As the global oil market is still rebalancing and counterbalancing, there is a possible rollover plan until the end of 2018 to lower global inventories and shore up prices. But whether there would be an equilibrium in crude supply and demand may not be effectively determined by OPEC even as its monitoring team on compliance achieved a resounding success in one year.
A reduced oil inventory was to prop up prices for more revenues. But would the deal as anticipated continue to bolster oil prices? Early November, Saudi oil minister Khalid al-Falih said that everybody recognises that the job is not done yet and so still have significant amount of work to do to bring in ventories down, he told Reuters.
OPEC consensus is that the deliberate cut in supply has become beneficial to the cartel members in budget deficits reduction. The intention was to draw down crude inventories and control the structure of backwardation. Backwardation in this sense is the amount by which the price of oil for immediate delivery differs from the price of delivery at a future date. But prices have still not been able to rise beyond the US$50-59 range. If that was the reason, OPEC would want a further extension. But non-OPEC leader; Russia is yet to give a nod to oil production cut beyond March 2018 which diplomatic shuttles are still on going.
Last year, the high inventory in the major trading hubs was a problem the oil cartel contended with. The limit to OPEC control was in its members and not to the American producers who have nothing to do with any production cut by OPEC and its allies. Over the years OPEC had resorted to production cut for a target price per barrel. The cartel controlled the price but the beneficiaries were outside the fold of OPEC. Next year an additional problem OPEC may be confronted with may be Russia that may opt out of production cut if price of crude goes beyond US$60 dollars a barrel.
Investors in crude have therefore been kept busy speculating on possible directions of futures oil markets. Russia believes that beyond US$60 a barrel, a more Pandora’s Box may be opened for American shale to counterbalance OPEC’s production cut. Many believe that Russia ab initio have agendas that do not tally with OPEC even when it supported production cut last December.
An expert in advancing reasons why Russia may drag its foot in lowering global oil inventories say a deal extension beyond March 2018 for crude oil price of US$60 and above becomes more beneficial to their competitors, the American shale producers. Increased U.S. shale production would keep inventories at levels that would lead to another glut; and with the vicious circle continuing.
Russia also believes that the geopolitical tensions in the fragile petro states of Venezuela, Nigeria, Iraq, Iran and Libya are near term threats to global supplies. And that includes the United States recent decertification of Iran in the nuclear deal. In the last two months, Russia made two significant inroads into two big emerging energy markets, China and India to make it not panic about moderate crude price increases.
Russia sold 14.16 percent equity stake in its prized state owned oil company, Rosneft to CEFC China, a private collective enterprise that has energy and financial services as its core business. The US$9 billion dollar deal is for long-term supply of Russian crude to China. Again Rosneft acquired 49. 13 percent of India’s Essar Oil in a consortium of US$12.9 billion deal concluded last August.
Russia’s energy deals with China, India as well as proxy deals with some other countries has geopolitical and economic implications aimed at expanding market share influence and revenue bases. Dave Forest writing in the Business Insider is of the view that well beyond these two countries, China now has a backdoor access into markets like India through Rosneft’s recently-acquired holdings in that country.
“That is a critical development for the world energy picture given that Chinese companies haven’t directly gained much access into India despite being one of the most important emerging players on the energy stage. Ownership in Rosneft could help open up opportunities in other parts of the world; with Rosneft currently having operations in places ranging from Egypt to Brazil to Venezuela.”
Russia believes in lower price in the 40s and 50s a barrel to checkmate the American tight oil. The magic formula which OPEC de facto leader Saudi Arabia has deployed internally but under the table is the massive investment in the downstream to reduce budget deficits. Nigeria can buy that for a dime.