Gone are the days when OPEC used to be an elitist group dominating the oil market; or maybe the days are not completely gone by yet. OPEC’s shrinking tenacity in the market is a function of four factors – the emergence of factional non-OPEC countries, the challenge with arriving at a consensus market output, climate change and emergence of green technologies, and the absence of major western capitalist countries in the OPEC pact. These four factors, put together, have eroded a significant portion of OPEC’s market share. Although OPEC is collaborating with other oil producers in what is now known as the OPEC+; the dousing influence of OPEC is still a trend. This article focuses on the second challenge grappling OPEC.
Whenever oil prices are falling, OPEC would step in by compelling member countries to cut their oil production. Usually, member countries would want to pump more crude to take advantage of higher crude oil prices. This has resulted to lingering dispute between member countries to the extent that Saudi Arabia would sometimes take the hit. In December 2023, Angola left the OPEC citing disagreement on production quotas. Angola noted that the production cut is detrimental to improving economic conditions in their country given that they cannot take advantage of higher crude oil prices when they emerge. Furthermore, Bloomberg reported that Angola was unfairly assigned a cut in June 2023 to allow the UAE pump more crude oil. Angola’s exit from OPEC shows that individual country contexts are likely not factored in production cut decisions. Nonetheless, the departure of Angola from OPEC does not seem to pose any threat to the oil bloc given that the country has failed to invest in advanced technology-driven oil production that could sustain its leadership in the bloc. For context, Angola’s production was at 1.65mbpd in 2007 when it joined OPEC and it declined to 1.10mbpd in 2023 when it exited OPEC. The departure of countries like Indonesia in 2016, Qatar in 2019, Ecuador in 2020 did not sway OPEC significantly and most analyst do not expect Angola’s exit to be an exception.
In the forthcoming ministerial meeting scheduled for June 1st, analysts expect that a decision will be taken to increase the supply of oil from OPEC member countries to balance the market. This is based on latest projection from the EIA and IEA, which suggests that although oil demand is expected to slow down in the near term; current supply levels need to be shored up to close the gap. Bloomberg referenced OPEC’s analysts, who noted that the OPEC+ group of 22 nations needs to increase output by about 1.6 million barrels a day from last month’s level if they are going to match demand. The question then is whether OPEC would reverse the production cuts to accommodate more supply. There is the view that due to dwindling fiscal revenues in developing countries which are OPEC member countries, OPEC may be forced to turn on the taps on oil production. The challenge with this, however, is that there are already member countries producing more than their assigned quotas and raising their quotas could have a neutral effect on fiscal revenue of these member countries and oil price. For instance, countries like Iraq and Kazakhstan have acknowledged pumping several hundred thousand barrels above their agreed limits. In a confluence like OPEC, where there are strands of tensions between member countries; getting all the countries to comply with production cut would naturally be challenging. Russia is also another case of a belligerent country, when it comes to complying with production, and the reason is not far-fetched. Russia needs all the money it can get to fund its lingering war with Ukraine and other invasion the government may have up its sleeve. In my opinion though, I do not think Russia can fight more than one war, given the attention it would draw from other western superpowers. That is a topic for a political debate and not the focus of this article. With Russia war capital needs, complying with production cuts is a definite No.
While the internal challenge on production quota in OPEC may not diffuse anytime soon, it is important to note that surging US shale production could also dash any hope of resolving this issue. U.S. is not a member of OPEC and therefore, does not fall under the purview of OPEC production cuts. How far OPEC can exert dominance in the oil market will yet depend on US shale production and emergence of a global oil producer like the US. A note on this point, however, is that US is a net importer of crude oil and that gives OPEC some headroom on market share. With that said US shale stockpiles have increased by over 40 million barrels since the beginning of the year. In turn, crude oil prices have gained almost $10 per barrel with most of the volatility abetted by geopolitical risks. Therefore, OPEC could get some respite on US rising oil production provided geopolitical tensions are not doused. That way, they can also latch on to gains by allowing member countries produce more with intense scrutiny on production levels.
To conclude this article, I agree that OPEC has a lot of emerging challenges to deal with, but I do not believe these challenges can alienate the Bloc from the oil market permanently. Instead, I am of the view that geopolitical tensions are the biggest support for OPEC and if the outlook is that these geopolitical tensions are not going away anytime soon, OPEC has no prime existential threat.
Written by Michael Ogunremi
Featured image credit – Bloomberg