Iran’s call on OPEC to kill off key committees is misguided
Last week, Iran requested that the Organization of the Petroleum Exporting Countries (OPEC) officially abandon the Joint Ministerial Monitoring Committee (JMMC) and the Joint Technical Committee (JTC), which oversee the OPEC/non-OPEC supply agreement. In a letter of complaint to the OPEC secretary-general, the Iranian minister of petroleum said that the “two committees have deviated from their initial objectives for which they were established.”
He argued that the committees had “clearly taken sides with the US” and were supporting sanctions against Iran. The Iranian minister believes that the committees’ work does not “secure the collective interests of OPEC” and that their activities must cease immediately.
The Iranian complaint comes at a crucial time, with the start of US sanctions on Iran and a month before the critical 175th Meeting of the OPEC Conference, due to be held on Dec. 6. The complaint was also put forward just before Saudi Arabia successfully chaired the 11th JMMC meeting in Abu Dhabi. At that time, based on data compiled by the JTC, the assembled oil producers noted that “2019 prospects point to higher supply growth than global requirements, which may require new strategies to balance the market.”
With its demand to disband the JMMC and JTC, Iran apparently wants to put OPEC back into a coma. Perhaps the Iranians have forgotten how the global oil markets were struggling before 2017, when Saudi Arabia stepped in with the assistance of some non-OPEC members to help bring stability.
It is surprising that Iran has called for a halt to the activities of these two main committees, which have successfully overseen the deal between OPEC and non-member countries. These committees worked tirelessly, holding extraordinary meetings and sensitive negotiations that succeeded in convincing countries that were not committed at the beginning of the output cut agreement. Eventually, by the end of 2017, all countries without exception, both within and outside OPEC, held their oil production to the highest level of compliance.
The collaboration between OPEC and non-OPEC members beyond 2018 is essential to the continuing stability of global oil markets. Both the JMMC and JTC have huge roles to play in this with their regular meetings and data collection. There are many outlooks that predict a global oil shortage by 2020, due to a lack of investment. Therefore, the current abundance of oil is a temporary trend.
When discussing the role of OPEC, the most prominent member is Saudi Arabia. As the world’s largest oil exporter, it led the effort to rebalance the market. Saudi Arabia was the nation that took the largest cuts to production and held to those cuts even when other OPEC members were not compliant.
In fact, sometimes it incurred larger cuts to make up for the overproduction of others. Saudi Arabia took a 41 percent total production ratio reduction, although the total production ratio reduction of OPEC members was 31 percent. The Kingdom was able to make such a sacrifice owing to its energy strategy, which is well-established. And because of its continuous investment in the oil industry even during a low-price environment, it will always be the first nation to step forward when a ramp-up in production is needed.
As there has been no failure in achieving the JMMC/JTC objectives, it must be wondered why Iran is so determined to kill off these two committees. It seems Iran is unhappy with the Saudi-Russia collaboration in OPEC+ over the past two years. Saudi Arabia managed to bring Russia on board, which helped to give oil markets the incentive to rebalance. The Russian presence helped to secure the cooperation of other nations that were previously republics of the Soviet Union.
While it is true that Saudi Arabia undertook almost double the output cut compared to Russia, global markets were impressed with Russia’s willingness to work with OPEC. This cooperation may at first glance have seemed to help only in sentimental aspects, but in the end it went effectively beyond that.
Iran’s claim that recent higher Saudi and Russian oil output pushed prices $15 per barrel lower in one month and only made US gasoline cheaper is poppycock. US gasoline prices went down as the markets entered winter, the low- demand season for gasoline. Iran also neglected to consider the impact of the International Energy Agency’s forecast for low oil demand, which has been promoted for the past two months to push down prices.
Iran wants to kill the efforts that started in early 2017. At that time, 24 OPEC and non-OPEC producers chose to follow a strategy that would lead to a rebalancing of oil markets with sustainable, stable oil prices and minimal price fluctuations, which could be easily absorbed by producers and consumers. This was reflected by the fundamentals of strong and effective market partners in the implementation of the agreement.
The new strategy of OPEC+ has resulted in a production increase after 18 months of tightening crude oil supplies with historic compliance.
That was quite a change from the situation of OPEC+ in 2002. The new strategy of OPEC+ has resulted in a production increase after 18 months of tightening crude oil supplies with historic compliance. OPEC+ managed to effectively change from an output cut to output increase last June and added 1 million barrels per day. The goal was to bring back the compliance rates to 100 percent from the high point of 150 percent, amid the disruption of production in Venezuela, Libya and Angola. This was far removed from 2002, when the OPEC/non-OPEC agreement turned into a fiasco, with producers leaving the agreement prematurely and randomly.
It is unfair and unjustified for Iran to make this bizarre request, which puts the future of OPEC under huge uncertainty. The request is especially ironic thinking back just two years, when many market analysts were claiming that nearly 60 years after it was founded, OPEC was in a coma. The organization, which was seemingly in a vegetative state with no role to play anymore in the global oil industry, has been transformed into a remarkable success. It is responsible for keeping the global economy on a stable, prosperous footing.
Now, what do those cynics think about Saudi Arabia’s wise guidance?
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza