How Market Backlash has Threatened OPEC’s Influence

OPEC has weathered threatened sanctions on its member states, and the potential collapse of its own price structure. Now, its future seems uncertain. Rather than being a relic of olden times, OPEC’s fading influence…

How Market Backlash has Threatened OPEC's Influence

OPEC has weathered threatened sanctions on its member states, and the potential collapse of its own price structure. Now, its future seems uncertain.

Rather than being a relic of olden times, OPEC’s fading influence is now setting in. Iran, long a swing producer, has led calls for a restructuring of the cartel. This demand is resonating in other producing nations, and it’s definitely affecting the North American market.

OPEC’s Lack of Shifting Exclusivity

Things were in a much better place last fall. Oil prices had hit their lowest in a year and U.S. production was overtaking Saudi Arabia. The cartel was on its way to a successful rebalancing of the global oil market.

Remember the $50 a barrel mark the group set at the end of last year? OPEC has implemented a flat production quota of 1.2 million barrels per day, retaining its actual production and looking to avoid a sudden adjustment. This was enough to stabilize prices, keeping them above $50 a barrel.

Source: McClatchy News

Not surprisingly, some members were upset with this course of action. Venezuela, Algeria, Russia and Iran expressed disapproval, arguing that the “decrease in the level of oil production during this period amounts to a loss to the world market and contributes to a reduction in prices.”

These producers have expressed several options, but they’re in favor of doing away with the total target. Saudi Arabia has also talked of tinkering with the figures to relieve immediate pressure, but it has been given no firm sign of willingness to do so.

These dissenting voices have forced the cartel into some new thinking, such as paying attention to its isolated demands. The agreement that OPEC reached in 2016 to rein in production has meant that any nation wishing to withdraw is prevented from doing so by the other OPEC members. Additionally, each country is required to wait out a minimum of two months before considering the other’s decision.

Whether this is reasonable remains to be seen. Under what circumstances could OPEC take back control without having to face the wrath of the other members? Right now, OPEC has some serious difficulty in putting together any sort of strategy.

Bad Inventories, Growing Demand

The overall oil market has been reacting accordingly. You may be thinking, “It is still $50 a barrel? That is really taking away OPEC’s monopoly.” The answer is yes, but it’s not as straightforward as that. Yes, the group is no longer in control of the market. This alone does not sound like a sure bet.

There are other factors, however, which make for a more cloudy outlook for OPEC. Venezuela was the reason for the collapse in production, but the country’s ailing finances could soon prove to be an issue for the group. Venezuela should be seeing an improvement this year, but the government is planning to cut spending by 20% this year to deal with its mounting debt.

Venezuela’s economic and political issues have tied OPEC’s hands on crude production. From a long-term perspective, the threat of U.S. sanctions on Iran are another factor that are contributing to the volatility of the oil market.

North American Oil Purveyors Not Afraid

From a purely macro point of view, OPEC’s influence is declining. A big reason for this has been the U.S. shale oil producer. This category has significantly increased oil production over the past two years, and all of the other players in the market have been working hard to adapt to this new reality.

Estonia’s Baltic Pipeline company is another case in point. The firm will go public in May, but it has an excuse for not going public in the first place: The company faces uncertainty. The firm is a major player in the Baltic Sea gas market, and it supplies Russia with natural gas. There’s no certainty, given the ongoing sanctions on Russia, as to whether the European Union will continue to import its natural gas.

To its credit, though, the Baltic Pipeline is working to grow its market. Over the past year, it’s signed a number of deals with Qatar, Norway and Sweden, and it’s hoping to boost pipeline gas exports by 31% in 2018 to 60 billion cubic meters of gas. The firm also introduced over $1 billion in new debt financing, and its margins and solvency remain sound.

Even after all of these changes, the market remains uncertain. This uncertainty hasn’t killed OPEC’s operations, but it does mean the future isn’t so clear.

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