The Organization of the Petroleum Exporting Countries (Opec) doesn’t stir as much fear in oil markets it once did, but it still has the power the shake up oil prices.
On Monday, officials from Opec and other oil producers including Russia begin two days of meetings in Vienna. The producers are all but certain to continue their production cuts, aimed at shoring up prices in the face of relentless increases in supply from outside the organisation, especially the US.
Opec’s main producers find themselves in a predicament: They must reduce their own output to sustain prices at levels they consider acceptable but the higher prices encourage more production by the US and other countries.
Markets will pay close attention because officials representing about half the world’s oil output will be meeting under the same roof in the Austrian capital. Anything unexpected at the meeting could send ripples through the energy and financial markets.
The meeting will bring together officials from Iran as well as Saudi Arabia and the UAE. Their presence together creates the potential for both fireworks and diplomatic moves to calm the tensions that have threatened to disrupt oil flows from the region.
Opec officials expect that the oil ministers and Russia will agree to extend their production cuts, which are intended to remove 1.2 million barrels a day, the equivalent of more than 1 per cent of global consumption, from the market.
Analysts at Barclays, an investment bank, said that unless the production cuts continue, the price for Brent crude, the international standard, could slide to the $50 a barrel range from the current $66 a barrel.
Countries like Saudi Arabia and Kuwait depend on petroleum revenues to finance their budgets and calculate that they are better off selling less than suffering a big price drop.
Current trends in the oil market present major challenges for Opec and Saudi Arabia, the world’s largest oil exporter. The strong growth in oil demand of the last two years, which has helped prop up prices, appears to fading.
Two numbers tell the story. With trade wars simmering, growth in world demand this year is likely to fall by about a quarter to just 1.1 million barrels a day, IHS Markit, a research firm, is forecasting. At the same time, production by shale drillers and other operators in the US is expected to surge by 1.5 million barrels a day.
That leaves Opec with an unpalatable choice, analysts say. Either keep cutting output or watch prices fall.
For consumers, on the other hand, falling prices are translating into lower fuel costs. Gasoline in the US was most recently selling for an average of $2.65 a gallon, about 18 cents less than a year ago.
Saudi Arabia is an Opec member, but it has developed a habit of opening and closing its oil spigots without waiting for the organisation’s meetings. “Opec’s decision-making is completely overshadowed by Saudi Arabia’s actual actions,” said Bill Farren-Price, a director of RS Energy Group, a market research firm.
Booming oil production in the US and the slowing of world economic growth because of President Donald Trump’s trade wars are largely out of Opec’s hands.
In addition, Opec has given increasing say over oil matters to Russia, a non-member that has become a de facto big player in oil producers’ discussions. And some Opec stalwarts like Venezuela have seen their oil industries crumble because of political instability and other factors, leaving them with little influence in Opec circles.
The Saudis have actually been cutting about three times the amount of oil that they pledged to cut to support prices. They are producing about 9.7 million barrels a day, about 1 million barrels less than they were producing late last year.
Russia is chipping in by cutting production, too, partly because of the fallout from the contamination of an export pipeline, as are Saudi Arabia’s allies, the UAE and Kuwait. But “essentially the Saudis are taking the big hit,” said Bhushan Bahree, an executive director at IHS Markit.
How long the Saudis will be willing to bear most of the burden remains to be seen. In 2014. they walked away from this “swing producer” role, letting prices crash and pressuring a reluctant Russia to join in cuts.
Opec is being squeezed into these major cutbacks at a time when political instability and US sanctions have removed more than 2.5 million barrels a day of oil from two of its members, Iran and Venezuela, compared with 2017 levels.
While surging production from the US is the main cause of Opec’s pain, output is also expected to increase from other countries outside of Opec, including Canada and Brazil.
For US consumers, meanwhile, the increased production by US producers could prove a buffer if there’s a major disruption in supplies as a result of the tensions in the Gulf region. The amount of Gulf oil that America imports is a fraction of what it used to be.
A major conflict in the Gulf would certainly roil the oil markets, but so far the spate of attacks on shipping and the recent downing of a US surveillance drone over the Strait of Hormuz have only created a modest blip in prices. Brent crude is selling well below the year’s highs of close to $75 a barrel in April.
One comfort factor: Restraining production means that more oil could be quickly unleashed when demand is growing. This spare capacity is pegged at a hefty 3.2 million barrels a day by the International Energy Agency, the Paris-based monitoring group.
A brightening of the gloomy outlook for the world economy could also increase demand, helping solve some of Opec’s problems. The truce reached by the US and China at the G20 meeting on Saturday gives some hope that the two countries might be able to resolve their trade war.
If economic conditions deteriorate, the strains on Opec will probably grow. “The balancing act will become extremely challenging,” analysts from the Oxford Institute for Energy Studies, a research unit, wrote in a recent paper.