2019: A pivotal year for OPEC

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2019: A pivotal year for OPEC

By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk

OPEC?s rollercoaster ride in Vienna highlights the growing divide within the oil cartel. Many oil analysts and financial gurus have fallen for the oldest media trick in the world, and a growing rift in the organization shows a new era is coming.

The so-called unexpected production cut, which was presented by OPEC?s media genius and Saudi Minister of Energy Khalid Al Falih, was not enough to curtail the current uncertainty in oil markets. After first indicating only a 800,000-1 million bpd production cut, which crashed prices straight away, Al Falih, in cooperation with his Russian colleague Novak, surprised the market 24 hours later by reporting a 1.2 million bpd production cut agreement. The reaction of the market, and all its specialists, was predictable. Crude oil prices jumped, reflecting a belief that stability had returned. Without even knowing the real facts of the agreement, oil market sentiment became immediately bullish. According to the statement by OPEC and its non-OPEC partners, the production cut will be based on October 2018 production levels, including some vague commitments of non-OPEC countries. Bullish sentiment seems to have returned, but several key factors remain unclear.

NOPEC?s only solution at present, if the cartel really wanted to change the market and re-establish its dominance, would have been a production cut agreement to the tone of 1.4-1.8 million bpd on the basis of October 2018 output. Some additional analysis shows that September-October 2018 production was already too high as most capable producers, such as Saudi Arabia and the UAE, increased their production substantially before the meeting. Other OPEC producers, especially Iraq and Libya, came back to the market at the same time. All these factors grossly outweighed the expected impact of U.S. sanctions on Iran. It seems that OPEC?s December 2018 decision has not done enough to counter the vast range of known threats in 2019.

At the same time, OPEC?s internal cohesion appears to be vanishing. Since 2017, the cartel has shown that it needs to reassess its internal strategy. The last OPEC meeting in Vienna, which was largely focused on the possible negative effects of U.S. sanctions on Iran, already demonstrated a deep and growing rift between the leading parties inside of the cartel.

The former hardline coalition of Iran, Venezuela and some minors, has been marginalized. Internal Arab regional conflicts have also taken their toll, which became painfully clear at the last meeting meeting when Qatari officials were mostly shunned by their Arab counterparts. The decision of Qatar to leave the oil cartel is not in any way linked to a new LNG/gas strategy of the peninsular state, but totally linked to its continued poor relation with Saudi Arabia, UAE, and some of the other Arab associates. Some even argue that Qatar?s decision has increased for a very short moment the internal cohesion of the cartel, but on the mid- to long-term the move will likely result in a further rift within the cartel. With Qatar out of the OPEC equation by January 2019, Iran feeling the real effects of U.S. sanctions and Venezuela?s political and economic situation deteriorating, a new reality will emerge. OPEC is no longer a coalition of the willing, in which large and smaller oil producers are combining their forces to reap the highest rewards possible.

In the next few months OPEC?s future will be decided. Looking at the current situation, a new strategy is needed, in which Russia plays a crucial role. Without the support of Moscow, OPEC will struggle to keep its position. Khalid Al Falih?s strategic insights and knowledge will be challenged by this new situation. Without Moscow, there can be no stability in the market. On that front, deteriorating relations between Saudi Crown Prince Mohammed bin Salman and the West can only be good for Saudi-Russo relations. Vladimir Putin?s High Five with MBS at the G20 summit could very well become the World Press Photo for 2019. The growing friendship and a stronger economic and military alliance between the Arab Gulf States and Moscow is clear, and NOPEC could be the first real sign of a new geopolitical reality.

Most oil ministers continue to claim that OPEC is not a geopolitical alliance, but the reality is clear. Oil and geopolitics are intimately connected and OPEC and Russia are the new global oil power brokers. We don?t know the exact form NOPEC will take, but 2019 could be the start of a new era, in which the West and Asia will need to readjust to a new geopolitical force. The current situation within OPEC is unsustainable and the stakes are high. All feel that the market should not be ruled by U.S. Presidential Tweets. Oil price watchers should prepare for extra volatility as Saudi Arabia and its partners continue to surprise the markets.

By Dr. Cyril Widdershoven for Oilprice.com