OPEC negotiations are always a tactical dance, but the footwork looks trickier than usual after the cartel meeting on Monday failed to make a decision on whether to extend oil production cuts to the next year.
A formal call to set the taps is expected on Tuesday, the final day of a two-day meeting of the Organization of Petroleum Exporting Countries and its allies, led by Russia, a group known as OPEC +.
But before the members gathered, there were growing signs of discontent within the fragile alliance.
“OPEC has always been a very black box,” Samantha Gross, director of the Energy Security and Climate Initiative at the Brookings Institution, told Al Jazeera. “I think they like it that way. I think it’s part of the game. They use this to their advantage and will keep a secret until tomorrow. “
However, it is no mystery that oil prices have come under severe pressure this year as the coronavirus pandemic weighs on global crude oil demand.
After prices collapsed earlier this year, Allianz struck a historic deal in April to cut production by 7.7 million barrels per day (bpd) – about eight percent of global supply.
Under this original contract, taps were scheduled to reopen in January, with the group increasing target production by 1.9 million bpd.
But the forecast on which this call was made is now absolutely out of date.
A new wave of COVID-19 infections in Europe and the US has resulted in more business restrictions and lockdowns, and hurt prospects for oil demand. If OPEC + relaxes the taps as planned in January, Rystad Energy expects a new surplus of 200 million barrels on the global oil markets by May.
That’s ugly math for government budgets hit by the double blow of coronavirus restrictions and falling oil prices – which explains why the Alliance is widely expected to extend production cuts into the first quarter of 2021.
“It’s not just about doing what’s right for the oil market. It is right for her bottom line – to be able to maintain a commitment to your citizens to turn on the lights in your country, “Louise Dickson, analyst at Rystad Energy, told Al Jazeera.
Alegria’s energy minister, who currently holds the rotating presidency of OPEC, said Monday the cartel had reached a consensus to extend the cuts by three months. This would bolster the status quo of prices, analysts say, while an extension of six months would help clear the memory flood and raise prices sensibly.
But the devil is in the details. And after a strong rally last week on positive news about coronavirus vaccines, oil prices came under renewed pressure on Monday. The global benchmark Brent crude for January delivery fell 59 cents to 47.59 a barrel, while the US benchmark West Texas Intermediate crude fell 19 cents to $ 45.34 a barrel.
An oil storage tank of the Russian oil pipeline monopoly Transneft is shown in the Baltic Sea port of Ust-Luga, Russia [File: Vladimir Soldatkin/Reuters]
Spoilers, players and the exempted
OPEC + has always been a spiky alliance dominated by Saudi Arabia and Russia. In the run-up to this week’s meeting, however, reports surfaced of dissatisfaction among smaller members – particularly in Iraq, Kazakhstan and the United Arab Emirates (UAE).
After Bloomberg News reported that the UAE – OPEC’s third largest producer – privately questioned whether to stay in the alliance, the country’s energy minister reiterated the UAE’s commitment to the group.
“The alliance is in danger of unraveling,” Dickson told Al Jazeera. “If the UAE left OPEC, they would increase their production potential and bring it back to 3.5 million bpd.”
There is also rumble from Iraq, OPEC’s second largest producer.
The country’s deputy prime minister Ali Allawi reportedly said during a virtual conference last week that he was no longer willing to accept the Alliance’s “one size fits all” approach to production cuts and would like items like that Per capita income and state funds are taken into account pumping quotes for individual members.
The depths of Iraq’s financial struggles were greatly eased last week after Bloomberg News reported that Baghdad was seeking an upfront payment of around $ 2 billion for crude oil supplies.
According to Dickson, Iraq – and Russia, too – may seek more leniency for members who exceed the quotas.
“Part of their strategy to make noise is to get a free pass for overproduction,” she said. “Everyone is just trying to get the best possible deal.”
The skyline including the Burj Khalifa tower is viewed as a ship landing stage in Port Rashid in Dubai, United Arab Emirates [File: Ahmed Jadallah/Reuters]OPEC + member Kazakhstan has also announced that it will increase production in the new year.
“Kazakhstan is also an interesting case because it could easily be influenced by Russia,” continued Dickson. “The alternative view is that Russia wants out [of the cuts] and they asked Kazakhstan to start the fire, but I don’t think that’s likely. “
Meanwhile, Iran and Venezuela are exempt from the OPEC + cuts due to the devastating impact of US sanctions and internal political unrest on their oil industries.
Libya was also exempt, though that could change if the country rapidly spun up oil production following a landmark ceasefire agreement between belligerent groups.
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