Another wild goose chase for OPEC?
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Representatives of the Organization have decided to extend output cuts for a further nine months. This is a compromise decision, which is likely necessary to prevent an intensification of the already deep cracks in a group that is struggling to remain solid
The producers are called on to decide whether to continue with #production #cuts which have proven unsatisfactory

The 172nd OPEC summit, held on May 25, 2017 in Vienna, was a watershed moment for the future and credibility of the Cartel. The oil producers were asked to decide whether to continue with the cuts policy - the results of which have proven to be largely unsatisfactory in terms of reducing global stocks and increasing prices – or, on the other hand, to undertake alternative strategies, dictated by a domestic-type policy and an evolving geopolitical framework. In the end, the line of continuity (or paralysis) prevailed, which, while witnessing a certain level of unity within the cartel, shows, above all, to what extent the producers’ options are limited in an oil market that is becoming increasingly less like the one in which they were accustomed to operating.

Nothing new under the sun

In full accordance with the decision made during the meeting last November, OPEC representatives have decided to extend the output cuts – amounting to 1.2 million barrels per day compared with October 2016 – for a period of nine months. Expressing satisfaction for levels of compliance recorded by members in the semester just gone (94% in February, according to official figures), the cartel has not yet addressed the issue of further downward adjustments from current output levels. This is a compromise decision, which is likely necessary to prevent an intensification of the already deep cracks in a group that is struggling to remain solid (Iran, Libya and Nigeria are still exempt from the full application of cuts), even in the face of the substantially unsatisfactory results of its policies. The cuts strategy launched in November 2016, has in fact caused a modest price increase, from which American shale producers have particularly benefited, having vigorously resumed their non-conventional activities. The reactions to last week’s extension to the agreement, which has caused crude oil to decline by a couple of dollars per barrel, seem to inexorably indicate OPEC’s inability to effectively influence the functioning of the markets.

The strategy to cut oil production, launched in November 2016, has caused a modest price increase, from which American shale producers have particularly benefited

The needle in the balance: non-OPEC producers

A strategy which, albeit disappointing, the cartel will hardly be able to implement without the cooperation of the non-OPEC producers, led by Russia (and comprising Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Sudan and South Sudan). During the joint meeting that accompanied the 172nd summit, the parties expressed their appreciation for the results achieved so far, emphasizing their commitment to cooperate in order to ensure the stability of the markets. To this end, non-OPEC will also extend their output cuts by a further nine months.
In fact, the group is particularly heterogeneous and its effective ability to remain aligned is yet to be seen. In fact, in an attempt to go beyond the official figures, non-OPEC compliance rates in April would have stood at around 69% compared with what was agreed in December: it seems that Russia, the guarantor of the unity of the block, has reduced its output below expectations, while countries such as Kazakhstan, Malaysia and South Sudan may have even increased their output. Contrasting signals, before which, in Vienna, it was difficult to undertake more ambitious cutting strategies, but which require a careful and continuous monitoring of the behavior of others.

OPEC has a strategy which, albeit disappointing, the cartel will hardly be able to implement without the cooperation of the group of non-OPEC producers, led by Russia

Scenario of political unrest

The 172nd summit was held at a time of political turmoil, both within the key countries of the Cartel and on the international chessboard. OPEC’s leader, Saudi Arabia, on the one hand, is preparing for the historic privatization of national energy company Saudi Aramco, whose value (and, therefore, that of Saudi revenue) shall also be determined by the performance of crude oil on the international markets. On the other hand, the unexpected rapprochement with Trump’s United States should also be noted, whose non-conventional producers can be considered the cartel’s number one enemy (or, at least, the root cause of its ruin). What will the implications be of the agreements between Washington and Riyadh on future cooperation within OPEC, and on future relations with the cartel and the producers led by Moscow? In Iran, the regional rival of the Saudis, shortly before the meeting in Vienna, President-in-Office Hassan Rohani was re-elected and was able to benefit from the stability of the oil market (and from its exemption from the November agreements) to snatch up the second term in the challenge against the conservatives. Tehran was granted a second exemption from the cuts provided for by the cartel and will theoretically be able to continue producing up to 3.8 million barrels of oil per day: however, in light of the rumors between Trump and the Saudi royalties, it could decide to adopt a less cooperative approach and expand production beyond the planned limits. Ultimately, the critical political, economic and social situation of Venezuela cannot be forgotten. The country ranks top in the world for oil reserves and is OPEC’s fifth largest producer (with approximately 10% of total output). The crisis affecting the South American country could lead to diametrically opposing outcomes: on the one hand, socio-economic difficulties could force President Maduro and state-owned company PDVSA to leverage production, despite the agreement, in order to expand the country’s market share (and, therefore, overall output); on the other hand, the criticality of the situation could instead lead to a further reduction in output, creating a restrictive effect on the market, which would favor OPEC’s needs, but independently of the cartel’s control.