OPEC’s Gambit to keep oil prices afloat

In the last five years, economics has, to an extent, eclipsed political motivations.
OPEC’s Gambit to keep oil prices afloat
Photo | AFP

The Organization of the Petroleum Exporting Countries and its allies (OPEC+), on June 2, decided to extend its deep oil output cuts into 2025. At the same time, it hinted at a partial roll-back in the last quarter of this year, as it reported a steady May output at 26.96 million barrels per day. Production cut extensions are efforts at lending buoyancy to prices as well as “to stabilise and balance the oil market in times of uncertainty”. Major producers within the group intend to taper cuts gradually, subject to market conditions, though slower macroeconomic growth and a cautious monetary outlook remain a drag on such a move.

A constellation of conditions comprising economic sentiment, geopolitics and political equations significantly reflect on OPEC’s production and distribution policies. The 1956 Suez canal block that led to the rationing of fuel in France and the UK, the 1973 Yom Kippur War, the 1979 Iranian revolution, the current Gaza crisis and similar turbulence in the Middle East have often sent oil prices flaring.

The markets are witnessing a muted reaction this time, with Latin America emerging as the nouveau oil frontier, a game-changer on the global supply scene. In response to an invitation to join OPEC+ in December last year, Brazil “declined to be a full member and instead only seeks to participate as an observer”. Brasilia is forging global energy partnerships, as the world’s top three oil consumers—the US, China and India—are establishing alliances for exploration and production in the region.

Though the 1973 oil embargo and its recessionary effect was a strain on Saudi-US relations, more than 50 years later, the two countries’ economic ideologies still revolve around the theme of oil and security. The 1990 Persian Gulf War led the Bush administration to launch Operation Desert Shield, stationing US troops in Saudi Arabia to safeguard Kuwaiti and Saudi oil fields. Saudi Arabian oil and American weaponry complement each other well.

As soon as the UN imposed its embargo on Iraqi and Kuwaiti exports, Saudi Aramco—at the US’s urging—initiated a production increase to cover the shortfall. The oil giant advanced the timetable to implement its crude expansion programme. Riyadh spent $4.7 billion reviving mothballed oil wells, drilling new ones and developing five offshore gas-oil separation plants. Output rose from 5.4 million bpd in July 1990 to 8.5 million bpd by December 1990. Around 3,00,000 bpd were provided free to the allied troops. The move kept crude prices reined in and strengthened US-Saudi relations.

In the last five years, economics has, to an extent, eclipsed political motivations. Riyadh is keen to shrink its dependence on oil while developing other sources of revenue. The lure of overseas financial participation prompted the kingdom to offer for sale Aramco shares this past week, amid fervent  investor interest, in an effort to unlock its hidden worth.

Saudi Arabia, as the de facto leader of the OPEC, has closely monitored output reductions within the cartel, in the midst of increased flow from other major producers such as the US, to shore up oil prices above the $85-mark and balance its budget. Aiming to tighten the market further, the issue of ‘capacity assessment and utilisation’ was resurrected recently as three independent consultants were commissioned to conduct a fresh audit. With heavy reliance on oil income for pushing their economic agenda, the capacity estimation exercise has initiated stress among the fraternity on earlier occasions too.

The imposition of output curbs triggered Angola’s exit from OPEC in December 2023, as it could ill afford restraints in times of Africa’s evolving oil dominance, a move that followed the footsteps of Ecuador and Qatar a few years back. The UAE had, earlier in the year, confronted the Saudis on the issue of capacity; with the Abu Dhabi National Oil recently reporting a higher maximum crude capacity on its website, it could seek a further increase in quota. As oil constitutes 90 percent of its exports and is a catalyst for Kuwait’s Vision 2035 programme, it requisites a larger share as volumes rise at its three domestic refineries.

Moscow holds a large inventory of crude on the back of dwindling processing capacity post Ukrainian attacks on Russian refineries, as it lobbies for an upward revision. Flouting output cut commitment and higher production figures reported by Iraq and Kazakhstan have precipitated tensions within the bloc, indicative of a gradual withdrawal of reductions.

The El Sharara oil field in Libya’s Murzuq desert, holding the largest proven reserves in Africa, recently emerged from a shutdown. Any curbs on Libya would be a blow to the nation’s fractured economy. Despite the lack of investment in Nigeria’s oil industry, the recent partial commissioning of Dangote refinery near Lagos could affect its capacity utilisation and quota allocation. In a surprise retraction, the audit exercise stands postponed by a year, citing the ongoing Ukraine war as a deterrent in case of Russia. The move is seen to maintain solidarity within the group.

Negotiating through this maze of economic and political complexity is a tough task as the relevance of fuel prices remain sacrosanct in an election year when Washington and Brussels are keen to keep energy costs low and have often called for an increase in OPEC+ output. Yet, speculative intent remains inherent to oil prices.

As T Boone Pickens, the American oil magnate and financier, once remarked, “It has become cheaper to look for oil on the floor of the New York Stock Exchange than in the ground.”

(Views are personal)


Ranjan Tandon | Senior markets specialist and author

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