Five ideas for OPEC's future strategy

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Five ideas for OPEC's future strategy

OPEC’s landmark output reduction deal with producers outside the bloc has restored health to the oil sector. But last week’s meeting in Jeddah of the Joint Ministerial Monitoring Committee — the body created to oversee the deal — provided little clarity about what form future collaboration between producers will take.
According to OPEC assessments, OECD oil storage levels — a key measure for the health of the market — are nearly back to normal, at just 12 million barrels above their five-year average (compared with 340 million above in January 2017).
The five-year average has been the target for OPEC and its non-OPEC allies since production cuts were put in place in January 2017; however the alliance still has yet to declare victory. In their eyes, there’s still more work to be done to rebalance the market.
The agreement by producers in late-2016 to limit output has surely been a success; oil prices — which have recovered from lows of under $30 a barrel in early 2016 to their current level of around $75 — would not be in such rude health if it wasn’t for the historic efforts of the 24 producers involved.
Now however, the time has come time to think about the future of the agreement and cooperation between producers in general, in order to find better ways to ensure the long-term stability of the market.
The JMMC’s chairman (and Saudi energy minister) Khalid Al-Falih, and this year’s president of OPEC (and UAE energy minister) Suhail Al-Mazrouei, told reporters in Jeddah that despite the recent improvements, current oil prices are not enough to bring back needed oil investments worldwide, and that new measures to assess the success of the cooperation between OPEC and non-OPEC are needed.

 These announcements did not add any clarity to the market other than that the current agreement, which is expected to come to an end in December this year, should be prolonged even if the market is balanced.

The time has come time to think about the future of cooperation between producers, in order to find better ways to ensure the long-term stability of the market.

Wael Mahdi

The picture is still not clear about what form longer-term cooperation between producers will take. Here are five things that OPEC states need to keep in mind. 

Firstly, the output cut agreement will need modifying at the producers’ next meeting in June. While the arrangement has been good for a market in surplus, it is a different story for when it turns to deficit. Keeping cuts intact in such a state is not good for prices, or for a group of producers that say that rebalancing is their mandate.

 Secondly, it is good to cut, but not too much. At the end of March, compliance with agreed production cuts hit a record high of 149 percent. But don’t let the numbers deceive. Not all cuts are voluntary, as many are forced to cut production due to maintenance or other technical and natural factors.
And it is obvious that some are cutting more than others, with Saudi Arabia reducing output by more than its quota. This situation is good for oil revenues, but is damaging for the deal, with many producers likely to no longer feel the need to comply further if others are doing the heavy lifting.
Thirdly, OPEC needs to be mindful of market share, especially those members that are choosing to overcomply with the deal. First quarter oil import figures from China — the world’s largest crude importer — show that competition in that market is stepping up. Saudi Arabia and Angola — whose compliance levels are high — saw market share fall year on year. The market share of Iraq, whose compliance record is low, rose, as did that of Iran and Libya, who are both excluded from the cuts. Non-OPEC members Russia and the US meanwhile saw their shares rise sharply. 

Fourthly, producers need to stick with the five-year average gauge for the moment. Alternative proposals put forward — including the health of investments or decline rates in oil fields — are fine measures for the long-term, but are not suitable for more short-term cooperation.

 Fifth, and finally, producers need to take the issue of investment seriously. OPEC countries need to use this year’s uptick in oil revenues to invest at home in upstream capabilities and finance other projects worldwide to fill in the financing gap. With international organizations such as the World Bank and some major private-sector lenders moving away from oil projects, OPEC should be leading the way and providing funds for projects worldwide.

  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter: @waelmahdi

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