Drama and a new deal at OPEC+ meeting in Vienna
There was high drama at the OPEC meeting in Vienna this week. Events were ratcheted up a week before when the Iraqi oil minister announced that OPEC+ (the OPEC nations and their 10 allies led by Russia) were considering an extra production cut of 400,000 barrels per day (bpd). Before that, many expected a rollover 1.2 million bpd that had been taken out last June by OPEC.
Some analysts were concerned whether a mere rollover would take sufficient barrels out of the market in the light of an impending wall of non-OPEC crude that is expected to hit the markets in the first half of 2020. As of November, the International Energy Agency (IEA) expected 2.3 million incremental barrels per day from the US, Brazil Norway, Guyana and others. The agency only foresaw a demand increase of 1.2 million bpd for that year, which is roughly half the supply increase.
Iraqi Oil Minister Thamer Ghadhban set the cat among the pigeons with his comment. While that statement and a more positive outlook on the US-China trade talks sent prices soaring by more than 5 percent, it also set market expectations. Anything less than 400,000 incremental barrels would most probably have sent the price of oil into a tailspin.
To make matters worse, Russian Energy Minister Alexander Novak said that he was not yet convinced that he favored extending the cuts, let alone increasing them. This echoed the sentiments of the country’s finance minister a few weeks earlier. Indeed, Russian producers have invested in new capacity and are eager to release new barrels onto the market. Igor Sechin, the influential chairman of Russian oil giant Rosneft, is particularly vociferous about the demands of industry. He is also close to Russian President Vladimir Putin.
This means that the powers that be at OPEC had their hands full. On one hand there was the pressure of incremental new cuts. On the other, there was non-compliance of the existing agreement by several countries, namely Iraq, Nigeria and Russia. Iran, Venezuela and Libya remained exempt from cuts.
Thursday proved to be a tough day. OPEC+’s Joint Ministerial Monitoring Committee (JMMC), which is tasked with monitoring OPEC+ compliance and is chaired by Russia’s Novak and Saudi Energy Minister Prince Abdulaziz bin Salman, recommended further cuts of 500,000 bpd.
The organization found a way of dealing with Russian objections by carving condensates out from the deal. This must have felt like an early Christmas present to Novak because Russia produces more than 800,000 bpd of condensates. A big chunk of new production is also condensates.
The real problem was how to distribute the cuts among the OPEC countries and how to bring the laggards into compliance. Saudi Arabia apparently felt that it could not be continuously asked to share the whole burden of cuts while others were let off the hook too lightly. This makes particular sense in light of the Aramco IPO. Investors would not appreciate continuous loss of volume if other producers never follow suit.
Discussions apparently became tense. By 10 p.m. that evening a press conference, which had been scheduled for 6 p.m., was canceled. Interestingly, markets barely reacted. They were down only 1.1 percent in early Asian trading. This could be explained by the fact that there had been a recent precedent. The same happened in last December’s meeting and the situation was then resolved at the next day’s OPEC+ meeting.
This year’s playbook was similar. On Friday, ministers confirmed that they would increase the cuts by 500,000 bpd — 372,000 bpd of the incremental cut will be shouldered by OPEC and the remainder by the non-OPEC allies. Saudi Arabia’s effective production would stand at 9.74 million bpd. Iraq and Nigeria agreed to take out an additional 50,000 bpd and 20,000 bpd respectively. The arrangement is going to last till the end of March and will be reviewed in Vienna on March 5 and 6.
Getting the quota numbers to stack up requires some mathematics, as always. The carve-out of condensates was a surprise. It does not just work in favor of Russia. (Kazakhstan, Oman and others produce condensate too.)
Markets reacted positively. They liked the headline numbers and seemed not too bothered about the relatively short duration of the deal or the implications of the condensate carve-out going forward. Oil went up by 1.6 percent, reaching 64.4 for Brent late on Friday. There was drama leading up to the conference for sure, but in the end OPEC+ managed to convince markets that they were doing the right thing.
At the same time, Aramco shares were priced at SR32 ($8.53) on Thursday. This is the upper end of the range, giving the company a market cap of 1.7 trillion dollars, which turns it into not just the most profitable company but also the largest one by market cap. The IPO will raise 25.6 billion dollars, exceeding the previous largest IPO of Alibaba in 2014 by $600 million.
• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources