Energy Capital & Power

OPEC Maintains its Grip, for Now

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Increased oil production from some OPEC non-member countries could point to a decline in the influence of the global exporters club. The ability of OPEC to make a deal to cut global output, however, shows the cartel still has clout. AOP examines the organization’s role in 2017 and beyond.
The Organization of the Petroleum Exporting Countries has long been viewed as one of the more powerful intergovernmental cartels in the world, maintaining an iron grip on oil and gas supply and demand for decades.
But some say that iron grip could be slipping, and the cartel’s power in the oil industry fading, as low oil and gas prices, increasingly cheaper and efficient technologies and new international competitors appear to be chipping away at the cartel’s dominance.
In December OPEC member countries and 11 non-member countries signed an agreement to cut production by 1.8 million barrels per day in an effort to stabilize low oil prices. At the end of January OPEC leaders said 1.5 million barrels per day had already been taken off the market because of the deal, and enforcement of the production reductions are in full swing.
Despite the decreases in production as promised, oil prices remain bearish, and may yet fall again. The price of oil decreased steadily last week on news that U.S. shale production is rising on initial oil price gains.
Still, even as some begin to doubt OPEC’s strength, the organization has decades of experience in carrying out its mission to regulate supply and prices of the world’s essential commodity. Even with growing international competition, the bloc still represents 40 percent of global oil production and 60 percent of the total crude oil traded internationally. With the demand for energy ever growing, especially in emerging markets in Africa and Asia, the demand for alliances with OPEC are also set to increase.

American crude on the rise

American crude production is at its highest level since April 2015, reaching 8.961 million barrels per day, with U.S. stockpiles rising by 2.84 million barrels in the week of Jan. 20. Though production has yet to reach the country’s 2015 peak of nearly 9.6 million barrels per day, the International Energy Agency expects production to continue to grow in 2017.
“There is no doubt that U.S. shale industry has emerged from the $30 barrels-a-day oil world we lived in a year ago much leaner and fitter,” the IEA said in a report.
U.S. domestic energy policies are also signaling a dramatic shift, as a Republican-led Washington D.C. aims to ramp up production and realign energy and trade policies to benefit the U.S. as an exporter, as opposed to an importer. The global oversupply is set to continue, as the U.S. Congress authorizes selling off 190 million barrels of oil between 2017 and 2025 from its strategic petroleum reserve in an effort to pay for infrastructure projects.
A report released by the U.S. Energy Information Administration states that the U.S. could be energy independent by 2026, reversing a decades-long trend of oil and gas imports, even as domestic energy consumption is expected to grow by 5 percent between 2016 and 2040.
This is far from the only concern in an over-supplied market. Because of major strides in technology, which has made drilling offshore and oil sands much cheaper, Canada and Brazil could add a combined 415,000 barrels per day to global markets in 2017, according to the IEA.

Landmark deal

Similar technological advances have boosted the production of other non-OPEC members like Russia, which announced that production in the ice-covered Arctic areas more than doubled in 2016. Total production in Russia for 2016 was estimated at 10.7 million barrels per day.
Russia and other non-OPEC producers, such as Mexico, Oman, Azerbaijan, Equatorial Guinea and South Sudan, played an instrumental part in December’s deal to cut production. Non-OPEC countries, which agreed to cut a total of 558,000 barrels per day, make up 32 percent of the overall production reductions.
The New York Times called the agreement “a rare, coordinated push to cut oil output” and further stated it was “an indication of how worried the Saudis and other exporters are about the fall in prices, particularly the plunge below $30 per barrel last winter.”
The drive for cooperation, some experts argue, is in part due to the noted frailty of OPEC after prices dropped to below $30 per barrel in the mid-1980s. In 1983 the paper published an article that the world’s largest oil cartel was losing influence. The reason? A steep decline in oil prices, combined with Western policy changes meant to combat the cartel’s dominance in the energy markets.
Fast forward three decades and enter another drastic decline in oil prices, and OPEC’s ability to stabilize the oil and gas market is again uncertain, especially as technology continues to enable producers worldwide to compete on the market.
There is no doubt that the inclusion of non-OPEC members made the announced production cuts more appealing to investors and traders. And while an argument could be made that the need to include non-OPEC members indicates a lessening of OPEC’s influence on the overall market, there is an equally strong argument that OPEC is the only organization that could have brokered such a comprehensive, historic deal.

Unity in world oil

Since 2014, the world has watched as oil prices rapidly and continuously declined, reaching lows of $28 per barrel in January 2016. Billions of dollars in projects were deferred or cancelled, tens of thousands of workers were laid off, oil-dependent countries watched the bedrock of their economies crumble, and new exploration came to a near standstill around the globe.
The impact was felt — to varying degrees — everywhere, from American wildcatters losing it all to Venezuela’s rapidly deteriorating political situation.
OPEC managed to do something about it. After the deal was announced, analysts watched prices surge immediately by 15 percent, rising from about $46 per barrel to $53.77.
In what was no small task, OPEC courted representatives from across the globe, and made a convincing for non-member countries to lay aside complex, competitive and at times even hostile relations in order to reach a deal. Member countries, specifically Saudi Arabia, Iran and Iraq, also overcame strained relations to strike the deal.
Though the United States is certainly a powerful player in the global oil markets, it has yet to unite other producers in an effort to drive change in the market. History has also shown that as other countries grow and expand their oil industries, OPEC similarly expands and grows.
OPEC began in 1960 as a predominantly Middle Eastern cartel, with four out of five founding members coming from the region (Iran, Iraq, Kuwait and Saudi Arabia). Venezuela was the only producer from outside the Middle East. Since then, the organization has expanded significantly, attracting more members from Asia, Africa, the Middle East and Latin America.
Membership continues to grow today as producers around the world seek to join. Gabon was originally granted membership in 1975 but left in 1995 and rejoined OPEC in 2016, seeking stability in its oil marketing and cooperation on investment. Similarly, Equatorial Guinea has submitted an application to join OPEC. Both countries produce just over 200,000 barrels per day. OPEC, which includes some of the world’s heaviest hitters in oil production, now offers the world’s smaller producers a voice in global talks on petroleum.
Even should the bloc lose global influence amid a rise in U.S. production, countries from Africa, Latin America and Asia are increasingly looking to the Middle East for relationships and investments in the energy sector. To these countries, OPEC offers an important alliance in a pushback against Western-focused trade policies.
OPEC leaders are optimistic that with cooperation, the markets will recover, despite growing competition. “We are not worried that production in the U.S. is increasing as prices go up because I think this will be absorbed by an increase in demand,” said Kuwaiti oil minister Essam Al-Marzouq, also the chair of the ministerial compliance committee for OPEC, at a news conference.
Certainly the data supports this view: The EIA expects world energy consumption to increase by 48 percent by 2040 and the World Energy Council expects fossil fuels will remain the number one source of energy. As January marked the start of the production cuts, time is still needed to see how effective the newest production cuts will be, as well as evaluate the effectiveness of OPEC’s hold on the market.

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Energy Capital & Power

Energy Capital & Power

Energy Capital & Power is the African continent’s leading investment platform for the energy sector. Through a series of events, online content and investment reports, we unite the entire energy value chain – from oil and gas exploration to renewable power – and facilitate global and intra-African investment and collaboration.