The last-minute deal by the Organisation of Petroleum Exporting Countries (Opec) and Russia to cut oil production is a pyrrhic victory. Opec knows it. The oil industry knows it.
The deal, which will see oil production cut by 1.2 million barrels per day, has already had significant short-term consequences: it stopped yet another oil price crash, the fourth such drop in the past five years, and the deal will likely keep prices stable until the current glut eases.
But the deal fails to address the single issue that has hampered the market since 2014, namely the transformation of the US from the world’s largest buyer into a net exporter of oil due to the advent of shale oil.
Opec’s response to shale oil has been ill-conceived experiments, first with removing production caps in an attempt to drive North American shale oil out of the markets, and then by reversing itself and focusing on elevating prices. Friday night’s decision makes it clear that Opec plans to continue to protect prices, even if that means giving up market share.
To be fair, there is no “good” option for Opec members. They are in a Catch-22 situation, with every decision likely to have negative consequences, but the ongoing US-China trade war makes protecting market share more important than ever, a fact that Opec seems to have ignored.
Opec’s announcement comes just a few days after China’s Sinopec said it would increase its purchases of US crude. The US has made its position clear. It plans to use China’s trade deficit with the US as a way to strong-arm its way into China’s energy markets. Every Opec cut enables further US progress.
There are a number of people who will say that the situation is not that simple. Oil markets – and refiners in particular – cannot switch oil at a whim, which is true.
But the US isn’t looking to sell a few barrels of oil on the side; it’s trying to cultivate a new market, and it has the backing of an administration that could set politically-based prices to cement the deal.
Opec needs to wake up. It still has the influence to counter the US and retain its market share, but whether it has the will remains to be seen.
Opec will have to prove to the world that it is the organisation best situated to provide balance to oil markets and to do that it will have to negotiate and convince others — including shale oil producers — that it is working in the best interests of everyone involved.