Why the world still needs OPEC+
September 2016 was a historical month for the Organization of the Petroleum Exporting Countries (OPEC). It was in Algeria that the group decided to cut production in the hope of lifting oil prices from their worst slump since the financial meltdown of 2007-2008.
I still remember the moment Saudi Energy Minister Khalid Al-Falih emerged from the meeting, giving a thumbs up to journalists to signal the success of the extraordinary OPEC meeting.
At last, OPEC had decided to do something after almost two years of letting prices go into free fall. That meeting put an end to the market share strategy that OPEC implemented in the autumn of 2014, and opened a new chapter in the history of cooperation between OPEC and non-OPEC producers, leading to the rise of an alliance known as OPEC+.
Two years later, we were all back in Algeria to celebrate the agreement with many of the oil ministers from signatory states. But where does the market go from here?
When the deal was struck, few believed that OPEC would overcome its internal differences and unite to save the market. Before the Algeria meeting, outspoken voices within OPEC had blamed producers from outside the group for the glut in the market. Ministers also pointed their fingers at the shale oil producers in North America.
As usual, at times of crisis, the entire market waited for OPEC to jump in and do something. The group took everyone by surprise when it decided to steady the course and defend its production ceiling of 30 million barrels per day (bpd).
OPEC is, unfortunately, known for making mistakes. Between November 2014 and early 2016, some OPEC members increased production so the group went above its market share of 30 million barrels. That added insult to injury, helping push down oil prices further, and spurring enmity toward OPEC.
OPEC+ succeeded in managing the market when oil prices were down — and now needs to prove it can do the same when oil prices are high.
It took the Russians some time to understand that they needed to work with OPEC. But in early 2016 — and shortly after oil prices hit the $30s levels — Moscow signaled it was open to a cut, and Energy Minister Alexander Novak met his Saudi, Venezuelan and Qatari counterparts in Doha.
The four producers who met in Doha did their part but they faced a hurdle in April when they wanted to sign the final deal. Saudi Arabia’s insistence of Iran’s participation in the cuts, and Tehran’s reluctance, resulted in the collapse of the agreement.
The deal moved back on track after a meeting between the Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin on the sidelines of a G-20 meeting in China in September 2016. That was instrumental in bringing Russia on board to support the OPEC, non-OPEC oil curbs.
Following that meeting, Saudi Arabia and Russia became very close and decided to do something about oil prices. Without that alliance nothing would have happened.
After a series of tough meetings of a high-level committee, the Algeria accord became an agreement signed in late 2016, after Russian pressure on Iran. In December, non-OPEC producers joined and everyone agreed on a collective cut of 1.8 million bpd.
That cuts agreement — despite going through difficult times, with both over- and under-compliance — is still in place today.
While it has been a bumpy road for the OPEC+ alliance, producers have matured and now realize the need for cooperation.
OPEC+ succeeded in managing the market when oil prices were down — and now needs to prove it can do the same when oil prices are high. The other test for OPEC+ is to institutionalize the deal and make it a long-term agreement.
Such an agreement is under preparation, and is set to be signed in December, with a heads of state summit planned to launch the new framework — although there is as yet no details about the timing and location.
So did OPEC+ succeed in the end? Yes — but this was not entirely due to the signatories’ efforts. A higher-than-expected oil demand — mainly from China and India — and major supply disruptions in many countries around the world all helped to accelerate the fall in global oil stocks.
The biggest challenge lying ahead is to keep Russia on board for many years, and to deal with political attacks against OPEC from the US, which needs a strong and functional OPEC.
Contrary to what many thought in 2015, OPEC is not dead. The world still needs it, but a modified version of OPEC — and that can not happen without the presence of Russia
Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi