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Global Risk Insights

Global Risk Insights

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How Long Can OPEC Remain United For?

OPEC logo

As the core international group of oil exporters, OPEC announced last Wednesday the first production limits since the 2008 financial crisis. Cuts had long been debated but unrealized due to Saudi Arabia’s apprehension at losing global market share to alternative sources, particularly the growth of shale oil production in the United States.

While high production and export levels in recent years have slowed the growth of competition from the United States, it came at a significant cost to several member states who have realized economic turmoil and exploding debt levels as a consequence of a global oil glut and subsequent low prices. Leading advocates for the decision to limit output were Nigeria and Venezuela, who rely on higher prices per barrel for economic vitality. In the end, these production limits will bring about a clear set of economic winners.

The US shale oil industry

Shale oil producers in the United States have struggled under globally depressed oil prices in recent years. US shale oil production has fallen from 9.6 million barrels per day (BPD) in April of 2015 to 8.58 million BPD in September. Rising oil prices will once again encourage additional rigs to break ground given improving economic viability.


While the Arab states including Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates will shoulder the bulk of the cuts, limits imposed on Iran actually exceed current production levels. OPEC agreed to impose on Iran an output baseline of 3.975 million BPD. Iran’s October output level of 3.7 million BPD was well below limits imposed by the Wednesday deal, allowing the state to actually increase output by capturing market share from Arab states curbing their production levels. Related: BP CEO Dudley: We’ll Double Our North Sea Oil Production By 2020

Since the collapse of the western sanctions in the wake of the April 2015 nuclear agreement, Iran has sought to recapture an international market for its oil exports. It has proved a fierce opponent to prior OPEC discussions on the limiting of output given the economic promise of export revenue and foreign direct investment in its energy infrastructure. OPEC’s concessions to Tehran in the Wednesday agreement accommodate its wishes to continue to exploit post-sanction energy export opportunities.


In 2013 nearly one quarter of all Chinese oil imports were from Saudi Arabia, making the Kingdom the single largest source of oil destined for China. Recognizing the vulnerability inherent in this high level of dependence, Beijing has since moved to diversify its energy sourcing.

Today, Saudi oil exports to China have fallen to 11.8 percent of Chinese imports, the lowest level since 2007. With Saudi Arabia realizing the most significant production cuts of the OPEC states, a reduction of 486,000 BPD, Beijing may be forced to accelerate its search for alternative energy sources, lost market share that Riyadh may not be able to regain in the future.

Nigeria, Algeria, Libya, and Venezuela

Each of these OPEC member states have suffered under long-depressed oil prices. With the glut of global oil production, each of these states faced difficulties in realizing returns on energy infrastructure investment and GDP growth from the industry. Specifically from Wednesday’s agreement, both Nigeria and Libya are exempt from any production caps, affording them a great opportunity to benefit from rising prices. Each country has set a target of increasing production levels, a target that the OPEC deal has now made very achievable

Will the OPEC agreement last?

In a Friday speech to the Center for Strategic and International Studies, former Saudi Oil Minister Ali Al-Naimi confirmed what was already known about the OPEC members, “Unfortunately we tend to cheat.”

While the promised production curb may help to balance a long-oversupplied oil market, maintaining OPEC member compliance with the terms of Wednesday’s agreement requires that it remains in the best interest of each member state to do so. Some concessions were made to identify and mitigate any incentive members may have to break Wednesday’s agreement. This can be seen in the concessions made to Tehran, allowing for a further increase in output. Related: Oil Markets Not Convinced OPEC Deal Can Kill The Glut

While Wednesday’s agreement will initially benefit all OPEC members with higher per barrel pricing, it will likely become increasingly untenable in the medium to longer term. The question at the heart of whether Wednesday’s agreement will endure is the geopolitical relationship between Saudi Arabia and Iran.

Saudi Arabia’s primary concern with not losing global market share, the driver of OPEC’s production policy since 2008, remains a key focus following Wednesday’s announcement. But the Kingdom has agreed to disproportionate enough that it is sure to lose some of its market dominance in a number of export markets. As mentioned, this will likely be especially visible in China. The faster these losses mount, the faster Riyadh will rethink its position.

Compounding this potential loss of Saudi market share is the fact that one of the producers most likely to capitalize on this shifting export landscape is Iran. Saudi Arabia and Iran are currently at odds over a number of current conflict across the Middle East, including in Syria and Yemen and regarding Iranian-backed Shia protests in Bahrain. While in the past political concessions from Tehran have been baked into OPEC agreements in which Iran stands to benefit, those concessions are lacking in the Wednesday agreement. It is likely that these existing tensions coupled with Iran’s expansion of its oil export markets following the rollback of sanctions will continue to strain the Kingdom’s commitment to maintaining the agreement in the longer term.

By Jon Lang via Global Risk Insights

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