OPEC-NOPEC Deal Swinging in Balance
By Reza Zandi
There is a widely-used saying in Persian “Dar Hamish-e Rouyeh Yek Pashneh Nemicharkhad”. The English equivalent is “It is a long lane that has no turning”, which literary means that the bad times cannot continue forever, and the good days will not last forever either. Currently, two out of five members of OPEC which founded the organization are under the US sanctions. This is while other three founders are showing the least organizational sympathy with them. OPEC brothers! Do you remember the past? Didn’t Iran and Venezuela assist you with their policies in OPEC at the time you were in need of help? Numerous examples can be cited for that. OPEC is the most influential organization developed by the third world countries, and as I have written in numerous occasions, the organization is a good perfect example proving that members can work jointly to benefit from a lucrative business, while actually being involved in a serious competition. Today, the Iranian people are closely monitoring what some of OPEC ministers are saying, and they would surely remember Saudi Arabia when its oil minister spared no time to announce that the kingdom would make up for any drop in Iran’s oil supply on the market as a result of US sanctions. Probably, the Venezuelans are doing the same thing. We want a united, non-politicized OPEC that seeks the interests of the people of its member states. In some occasions, OPEC members have shown the capacity to be united, even though varying standpoints might have been voiced from within the organization.
1- Venezuela’s economy is in a bad shape. The country is under US sanctions. Based on the latest OPEC report, the daily production of Venezuela is dropped to 1.436 million barrels per day from its average production of 2.154 million barrels in 2016. Who gets happy with that? Are there anybody among the members who gets happy from the weakness of a country that is holding the largest proven oil reserves? If there are any, they should know they are deviating from the OPEC ideals. Venezuela’s president has recently instructed his oil minister to attract whatever help he can to revive and boost the country’s production to the same level as before.
2- Ignoring his allies’ pleas, the US president, Donald Trump, just a few days ago scrapped the nuclear deal and re-imposed the severest sanctions on Iran’s economy and its oil industry. Immediately after that, some of the OPEC ministers assured that the market would not be faced with any shortage and turbulence resulting from Iran’s sanctions. Such statements might be seen in line with OPEC ultimate goal of guaranteeing the global oil supply. However, isn’t it a way to back the US in its effort to put sanctions on Iran?
The Iranian oil industry was weakened during the 8 years of war with Iraq, but it didn’t fall apart. It has also been able to endure draconian sanctions by the US and its allies. According to the latest OPEC report, Iran’s production in April this year was around 3.823 million bpd. Although the US pressure will surely lower Iran’s export than it is actually planned by the Iranian officials, the new sanctions regardless of their magnitude and the impact they might leave on Iran’s oil industry will one day come to an end. Then, it would be a time to see where the advocates of sanctions would be standing.
3-“We in OPEC pride ourselves as friends of the US,” the OPEC Secretary General, Mohammed Sanusi Barkindo, was quoted as saying by the media, while reacting to Trump’s tweet on OPEC. I have spoken with some of the Iranian government officials at the Iranian Ministry of Petroleum. They have been upset about Mr. Barkindo’s position. They are in fact taken by surprise that such statements are made at the time when two of OPEC founders are under the severest sanctions by the US. Mohammed Sanusi Barkindo is an oil diplomat. In fact, it was through his and some of OPEC ministers’ efforts that the historic agreement between OPEC and non-OPEC producers was struck in 2017. Mr. Barkindo has every capacity to display OPEC unity once again. OPEC itself is an organization that has proven time and again that it has the potential to make big deals, even though its members might have different viewpoints.
4- Donald Trump has recently railed against OPEC, accusing the organization of supply manipulation which has led to the price increase. However, is the US president really unhappy with the price increase? Had it not been because of the price increase, the US would have not been able to increase its shale oil production thus boosting its economy. Didn’t it help the US to soar its export to China? It might be interesting for you to know that US exports to China in February was higher that Iran’s export to China in January. In February 2018, the US dispatched 430 cargos, carrying 10 million barrels of oil to China. This is while only 410 cargos were dispatched from Iran to China. Therefore, Trump is not only happy with higher prices, but also the organization can provide with an easy scapegoat whereby the American voters can be convinced that if they need to pay more at the petrol pumps it is because of OPEC.
5- The major goal of the output cut agreement between OPEC and non-OPEC producers was to maintain the level of global oil inventories, using the average level of 5 years ago as the starting point. It seems that the goal is achieved as the most OPEC participants have reportedly complied with the supply-cut agreement. Adherence to the curbs by OPEC producers rose to 152% in April, showing an unprecedented commitment to the terms of agreement by OPEC producers. From the onset of the agreement, the level of crude oil inventories in the developed countries dropped by 360,000 barrels. It is reported that it is currently 20,000,000 barrels lower than the average of 5 years ago. After all, a valid agreement is still in place between OPEC and non-OPEC producers till the end of 2018. So, OPEC is now standing at the critical juncture as to how it is going to support its members and live up to its collective commitments.
6- Energy ministers of OPEC kingpin Saudi Arabia and Russia at St. Petersburg publicly announced their intention to pull out of the agreement before the end of 2018. It may sound a wise approach for the major OPEC and non-OPEC producers to increase their productions so as to be able to earn more from the higher prices especially at the time when Venezuela’s production is drastically dropped and Iran’s production might fall too in the wake of intensification of the sanctions.
Things are not very good for some other OPEC members including Libya as well. One can assume different scenarios regarding a drop in Iran’s production in 2019. Everybody knows that no major drop is going to occur on either Iran’s production or its export in the current year. However, I cannot help saying that, by raising such matters, Russia and Saudi Arabia might be seeking to wind down OPEC-non-OPEC output cut plan from 1.8 million barrels per day to merely 0.9 mbd. This would enable them to prepare the public opinion before the agreement is annulled, then persuade the other members behind closed doors to follow suit. This means that instead of 1.8 million barrels cut, OPEC and non-OPEC producers would agree to cut only 900,000 barrels from their overall daily production. If other members decide to refrain from adopting the new cut policies, non-compliance by Russians and Saudis would continue to weigh on these two countries.
Saudi Arabia’s crude output is 100,000 b/d lower than its initial commitment to the agreement. This can be a good lever in the hands of Saudis to persuade the others to follow suit.
7- “It is a long lane that has no turning.” When Kuwait was occupied by Iraq, Iran provided shelter to an influx of refugees from Kuwait, and dispatched expert teams to extinguish Kuwait’s oil wells. When the ISIS reached Bagdad, Iran rushed to help the Iraqis. Everybody knows that no one can change the geography. Therefore, Iran will remain Saudi Arabia’s neighbor forever. Maybe rewriting the region’s history where there is no enmity between the neighbors would be a suitable way out. This way, it would be easier to remind OPEC members of how the US exerted pressure on OPEC by summoning the national oil companies of some of its members to appear in before courts.
You have not forgotten the historic cases, haven’t you? Of course, I believe that OPEC cannot clash with a big market and major producers such as the US. In contrast, I believe that OPEC should come to term with the US based on its interests. However, based on its interests and based on interests of all its members.