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Liubov Georges

Liubov Georges

Liubov Georges has graduated NYU with Master's Degree in Energy Policy and Economics. Currently, she is an energy analyst at DTN Oil&Gas

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What Would The End Of OPEC Mean?

The Organization of the Petroleum Exporting Countries - the oil market institution that has exerted an unyielding power over the price of crude for nearly 60 years - is now in deep crisis. The latest OPEC meeting in Vienna offered new insights into the cartel’s raging civil war that is tearing it apart and threatens to ultimately make the cartel irrelevant.

In a two-year period since the group of 15 major oil producers formed an alliance with Russia, OPEC’s smaller members have been marginalized, their voices have been diminished and Saudi Arabia seems to prioritize its partnership with Moscow above all else. An unlikely partnership between Saudi Arabia and Russia is causing dissension within OPEC, with one of the oldest members announcing it would withdraw from the organization in January just days prior to the talks. With Russia tightening its grip over OPEC’s decisions and the United States officially reaching net oil exporting status in late November for the first time in decades, even if only briefly, the new world oil order is now dependent on three energy superpowers: Saudi Arabia, Russia and the United States.

OPEC has been under the barrage of external and internal forces since the day of its inception in 1960. Yet, even during the most tumultuous years of the Iran-Iraq war in the 1980s, OPEC still met twice a year and managed to coordinate policy to support the price of crude oil. This was not the case during the pivotal OPEC meeting last week in Vienna, where geopolitics ruthlessly invaded the talks.

After the first day of negotiations OPEC members emerged without a consensus, canceled a press conference and crude prices tumbled. West Texas Intermediate had already suffered a hefty loss of 22% in November, marking the worst month for the U.S. oil benchmark since the financial crisis in 2008. In early Thursday trading, WTI shed an additional 3% in value after Saudi Energy Minister Khalid al-Falih said that a “no deal” outcome is real and that Saudi Arabia would not go for a production cut alone. These comments were quickly followed by a statement from Iranian Oil Minister Bijan Zanganesh that his country under no circumstances would curb output, citing U.S. sanctions. Zanganesh’s comments carried a clear undertone of bitterness over Saudi cooperation with U.S. President Donald Trump’s re-imposition of the sanctions that took effect in early November. Related: Saudi Arabia Under Fire From All Sides

During the second day of the conference, the oil market held its breath, while waiting for the Russian Delegation to come to the negotiating table. Russia - the second largest oil producer in the world has increased its oil production to a post-Soviet high of 11.41 million bpd while Russian oil companies have been investing heavily in their upstream activities and oilfield maintenance.

Russia agreed to a larger-than-expected cut of 230,000 bpd, the lion’s share of the 400,000 bpd reduction in crude production from the non-OPEC contingent. Saudi Arabia would curb output by 250,000 bpd under OPEC’s collective cut of 800,000 bpd according to news reports, with OPEC+ offering no breakdown of country quotas.

Upon conclusion of the OPEC+ talks, WTI futures stabilized, recovering 2.2% of their value on Dec. 7 to $52.61 bbl while Brent recovered by 2.7% to $61.67 bbl. Several analysts said oil futures would have sold off absent an agreement. Russia played a crucial role in bringing Iran into the framework of an agreement while backing temporary exemptions from the cuts for Libya, Nigeria, Iran and Venezuela. After the hard-fought agreement was struck Nigerian oil minister, Emmanuel Ibe Kachikwu was quoted as saying that not having Russia “around the table would be a futile exercise.”

Other OPEC members are not as enthusiastic about Russia’s growing influence over the cartel’s decisions. The nation of Qatar, which joined OPEC in 1961, served notice of withdrawal from the organization days before the meeting in Vienna. Qatar’s oil production has steadily declined and currently represents only 2% of OPEC’s total output or 609,000 bpd. Yet, news that one of the oldest OPEC members is leaving the cartel after almost 60 years is serving as a shot across the bow for the Vienna-headquartered producer group.

Two days of intense negotiations last week revealed intensifying resentment from members of OPEC who feel sidelined by the growing partnership between Saudi Arabia and Russia. As several members chafed against the power shift within the organization, they were prepared to vote against an agreement that would halt the selloff in a commodity critical to their economies, ultimately rendering OPEC and their meeting useless and irrelevant.

Related: Will China Turn Its Back On U.S. LNG?

Ever since Saudi Arabia and Russia reached an agreement on production cuts in late 2016, the Saudis have insisted that Russia participate in all meetings. The success of this unexpected partnership is a testament to the fact that even geopolitical rivals that have been on opposing sides of almost every conflict affecting the Middle East can become allies when mutually beneficial.

While some analysts predict the biggest test for the Saudi-Russian relationship is yet to come, the two countries enjoy their “marriage made in oil heaven” along with the multi-billion-dollar investment projects following King Salman’s first trip to Moscow. During the G20 International Forum in Buenos Aires, Russian President Vladimir Putin and Saudi Crown Prince Mohammad bin Salman shared laughs and high-fives.

Fading OPEC influence has everything to do with the energy renaissance in the United States. The United States has emerged as one of the world’s top three oil producers, recently overtaking Russia to become the world’s top oil producer, a dramatic turnaround from 10 years ago that has readjusted the world order and shaken OPEC. In late November, the United States was a net oil exporter while shipping a record 3.2 million bpd of crude oil, more than double the volume from a year ago. It was the first time petroleum exports exceeded imports since 1949.

U.S. producers have added a volume equivalent to the entire output of OPEC’s Nigeria in the past twelve months, reaching record high crude production at 11.7 million bpd in November. According to the Energy Information Administration, U.S. crude production could reach 12.05 million bpd in April, six months sooner than forecast in October, and reaching 12.29 million bpd in December 2019. These are the worrying statistics for OPEC, as it loses control in determining world oil prices and market share to producers in the United States. And while Russia has worked with OPEC in the past, Saudi Arabia clearly eyes Russia as an essential partner to guide world oil prices through targeted production cuts.

As the Moscow-Riyadh partnership strengthens and OPEC cohesion frays, the growing power of the United States over the global oil markets was clearly a factor during the negotiations in Vienna last week. The verdict is still out on whether the OPEC+ deal to cut 1.2 million bpd during the first half of 2019 will be enough to offset surging production from the United States and bring the markets into equilibrium.

Even before last week’s meeting and the acrimony leading up to it, OPEC faced an ominous future. News reports surfaced in early November that King Abdullah Petroleum Studies and Research Center, a think tank based in Riyadh, was conducting a study on what it would mean if OPEC dissolved. Kapsarc, headed by former U.S. EIA Administrator Adam Sieminski, are considering what the end of OPEC would mean to world oil markets and to Saudi Arabia’s role in those markets.

By Liubov Georges for Oilprice.com

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  • Mamdouh G Salameh on December 14 2018 said:
    There will be no end for OPEC. OPEC is going from strength to strength. The influence of OPEC has closely followed the peaks and valleys of the world's demand for oil. September 14, 2018 marked the group's fifty-eight anniversary — more than a half-century of existence characterized by embargo, conflict, and even war.

    Evidence of OPEC’s growing stature and influence on the global oil market and prices is the US Congress’ attempts to wrest more control over global oil markets away from foreign producers by pushing a bill that would let the US sue OPEC for an alleged oil price fixing. The bill called “No Oil Producing and Exporting Cartels Act,” or NOPEC, was first introduced in May this year. OPEC is not a cartel. Moreover it will take years to play out in court.

    If NOPEC ever becomes a law and the United States tries to sue any OPEC member under the NOPEC Act, OPEC has the economic muscle to retaliate against the United States.

    Claims that Saudi Arabia is mulling over its future membership of OPEC with the realization that demand for oil will one day peak and Saudi Arabia needs to prepare for that day is no more than hot desert air. Still, Saudi Arabia doesn’t have to leave OPEC to prepare for a peak in oil demand.

    Of course, Saudi Arabia has always the option to withdraw its membership of OPEC but to what advantage. Saudi Arabia draws a lot of political and economic influence from being part of an influential organization such as OPEC. Were it to decide to withdraw from OPEC, it will certainly lose a lot of influence in the global oil market.

    A Saudi Arabia speaking on behalf of OPEC with 71.8% of global proven reserves and 42.6% of global production is far more influential in the global oil market than having the world pondering about the true volume of its proven oil reserves and production capacity.

    Saudi Arabia’s partnership with Russia is not an alternative to OPEC. This is a tactical partnership used by President Putin to enhance his country’s influence over the global oil market. Moreover, Saudi Arabia and Russia are diametrically opposed to each other ideologically and politically. Russia supported by China is trying to undermine the current unipolar role currently enjoyed by the United States whist Saudi Arabia will do anything to remain in the United States’ good books. So such a partnership will be very short-lived.

    Now let me correct some of the false claims you made in your article about the United States reaching net oil exporting status and overtaking Russia to become the world’s largest oil producer. These claims are no more than self-delusion and wishful thinking.

    There are two cardinal figures which determine the level of US oil imports and exports, namely US oil production and US consumption.

    In 2018 US consumption was estimated at 20.5 million barrels a day (mbd) and production is claimed by the EIA to be 11.7 mbd thus necessitating imports of 8.8 mbd. No matter how you try to manipulate US oil fundamentals, the glaring fact remains, namely the US will never become self-sufficient in oil even for one minute.

    The EIA claims that the United States exports 3.2 mbd. But they don’t also mention that an equivalent amount of imports of heavy and medium crude are imported for use by US refineries that are not equipped to refine the ultra-light tight oil, meaning there are no net exports.

    When it comes to US oil production, the EIA figure of 11.7 mbd is overstated by at least 2 mbd. But this figure includes NGLs which come from natural gas wells and include such things as ethane, propane, butane and pentanes. These may not qualify as crude oil. In fact, major exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And if major exchanges don’t accept natural gas liquids as crude oil, then they are not crude oil. Therefore, US oil production couldn’t be bigger than 9.9 mbd compare with 11.41 mbd for Russia and 10.7 mbd for Saudi Arabia.

    An MIT study published in December 2017 reached the conclusion that the US vastly overstates oil production forecasts and that the EIA has been exaggerating the effect of fracking technology on well productivity

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Lincoln Akintola on December 15 2018 said:
    OPEC will be dead by ending of 2019, America's oil production will continue rising and with prices not rising cause of the glut from American production, more countries would leave OPEC.

    Shale drillers with better technology will supply more oil to the market at even cheaper production cost, with more shale oil, OPEC will continue with it dumb production cuts to just stabilize prices and not even to increase prices.

    The latest production cuts only stabilized prices, it didn't raise prices...prices will soon go lower, and OPEC will do another production cuts to stabilize prices from falling further; American Shale will take OPEC market share from production cuts, and prices will be in the red.


    OPEC is dead, cause American Shale Producers are determined to out-export OPEC producers...same way Russian producers want to put export OPEC producers.

    America and Russia see Oil export as national political/economic strategy, to deny OPEC countries of huge forex, and prevent them from using oil revenues to modernize their economies, from becoming competitive to their own advanced economies.

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