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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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OPEC’s Future Is Increasingly Uncertain

  • The diverse interests among OPEC members, seen in the varying responses to membership offers and production quotas, may pose a threat to the organization's unity and survival.
  • The adjustments of production quotas for some members reflect OPEC's acknowledgment of their struggles to attract foreign capital for developing their hydrocarbon resources.
  • Current oil prices appear non-responsive to OPEC's supply control efforts, causing frustration within the group and raising questions about the effectiveness and future of its control over world oil prices.

OPEC tends to live in the public mind as a monolithic, unshakeable structure—except when oil prices drop. Yet the group is not as homogenous or, indeed, unanimous as it may see. And its members' different interests may, at some point, threaten its survival.

At their last ministerial meeting in June, OPEC leaders decided to extend their voluntary production cuts into 2024. They also decided to adjust the quotas of those members that were finding it hard to reach previously agreed production levels.

Meanwhile, OPEC apparently approached Guyana with a proposal to take it on as a member. Guyana refused, saying it wanted to focus on production growth. Brazil has also resisted becoming a member of the group, preferring to go it alone.

Indonesia, for its part, left OPEC in the mid-2000s when it became a net oil importer but later rejoined the cartel. And while the possibility is remote, it may not remain the only one to do this ever.

Then there was that report from the Wall Street Journal that said the UAE was considering leaving the group. The UAE was quick to deny the report, but the doubts remained, especially as the report came during a time when political tensions spiked between the UAE and its larger OPEC partner Saudi Arabia.

At the last OPEC+ meeting, Saudi Arabia announced what its energy minister called "a Saudi lollipop": a voluntary cut of 1 million bpd in production while the UAE was allowed to boost its own production by 200,000 bpd.

Yet this may not have been the most important part of the news to come out of that meeting. In a recent article, Reuters' Ahmad Ghaddar suggested that another element of the agreement may have higher significance—the adjustment of baselines and production quotas. Related: UAE: Latest Output Cuts Are Enough To Balance The Oil Market

With the adjustment, OPEC acknowledged that some members, such as Iraq, Nigeria, and Angola simply do not have the production capacity to produce as much as their original quotas called for. So, these quotas were adjusted accordingly, reflecting, incidentally, these OPEC members' troubles in attracting foreign capital, on which they depend for developing their hydrocarbon resources.

At the same time, Saudi Arabia's voluntary cut comes amid plans to boost its spare production capacity to 13 million barrels daily over the medium term and pretty much identical plans in the UAE.

In other words, some OPEC members may be struggling to even maintain production, but others are boosting their spare capacity because they can afford to do it. According to Ghaddar, this could widen the gap between Gulf members—perhaps excluding Iraq—and African members such as Nigeria and Angola.

Gulf members already have the upper hand in OPEC, to be sure. The quota adjustment, Ghaddar says, would only increase their influence and reduce the influence of African members. It may not be too far-fetched to speculate if these African members might not decide to go the Indonesia way.

Nigeria has complained about the quotas on more than one occasion, even if it cannot reach them. So has the UAE, which is a Gulf member—a member of the dominant group in OPEC. For now, membership of OPEC and the power to dictate world prices has kept the group together, but what happens when world prices stop responding? 

This is what's happening right now. Oil traders do not seem to care about oil demand and supply. What they care about is GDP reports and projections, and the latest factory activity data out of China and the United States. As a result, prices are stuck around $70-75 per barrel, and even the news that Saudi Arabia will extend its voluntary cuts and that Russia will cut exports did not help push them higher.

This state of affairs must be a source of frustration in the group, as are analyst expectations that these cuts, per Eurasia Group, "will do little to shift bearish sentiment in a market that is consumed with pessimism about the prospects for oil demand growth in the second half of the year".

Guyana could provide inspiration for some. The tiny South American country that turned into an oil hotspot in a matter of a few years has refused to join the group on the grounds that it wants to maximize the returns it can extract from its resources.

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Interestingly, it was the Wall Street Journal again that reported the news that OPEC had invited Guyana to join it, following which official OPEC sources denied such an invitation had been extended.

OPEC's leader, Saudi Arabia, has consistently demonstrated that the group was united even when there were internal rifts and disagreements about production policy. Indeed, all members have made an effort to keep it united for the good of every member—any news of internal divisions sends the price of oil tumbling. The question, at a price-sensitive moment like this, is how long this unity will last if efforts to direct prices by supply control continue failing.

By Irina Slav for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on July 06 2023 said:
    How did the author manage to reach such a conclusion? Nothing in the article justifies it.

    OPEC+ is the most influential player in the global oil market. Its cooperation with Russia has consolidated its position and made it a force to be reckoned with.

    Since its founding in 1960 in Baghdad, OPEC has passed through critical periods in its history such as wars between some of its members, a foreign imperialistic invasion of one member and multiple global financial crises. Yet, it is still standing on its feet defending its members’ interests and helping to maintain balance in the oil market.

    Despite persistent efforts by the United States to undermine its authority and policies by allowing US shale oil production to flood the global oil market even at a loss, it emerged from the pandemic as the most dominant force in the market while US shale oil ended as a spent force.

    In an organization whose members have different interests and ambitions, one would expect a bit of dissent and some internal rifts among members. To their credit members always end their meetings with agreements because they know that their cohesion is what gives OPEC its influence.

    It is most probable that Guyana would have jumped at the opportunity to join OPEC but I doubt that ExxonMobil and by extension the United States would have allowed it.

    OPEC+ faces a dilemma vis-à-vis the current weakness in oil prices. It is the type of dilemma where its efforts to balance the market and stabilize prices by cutting production can’t work against persistent fears of a global banking or financial crisis that could be triggered by a shaky US banking system and the threat of more collapses among US commercial banks.

    Still, sooner or later market fundamentals will prevail.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • Noel HEIM on July 08 2023 said:
    No mention of SPR releases from the West.

Leave a comment




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