Photo | AFP
The Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) decided on June 2 to extend the deep cuts in crude oil production until 2025. At the same time, they reported that production remained stable in May at 26.96 million barrels per day, and hinted at a partial reduction in the cuts in the fourth quarter of this year. The extension of the cuts is an effort to “stabilize and balance the oil market in uncertain times” as well as to boost prices. The major oil producers in the group intend to gradually reduce the production cuts depending on market conditions, but slowing macroeconomic growth and a cautious financial outlook are hindering this move.
A variety of economic, geopolitical and political factors heavily influence OPEC's production and distribution policies. Oil prices have often risen sharply in the wake of the 1956 blockade of the Suez Canal which led to fuel rationing in France and the UK, the 1973 Yom Kippur War, the 1979 Iranian Revolution, the current Gaza crisis and similar unrest in the Middle East.
This time, the market is seeing a muted reaction as Latin America emerges as the new oil frontier, revolutionizing the global supply scene. In response to an invitation to join OPEC+ in December last year, Brazil responded by declining full membership and only participating as an observer. Brasilia is building a global energy partnership as the world's biggest oil consumers, the United States, China and India, form an alliance in exploration and production in the region.
The 1973 oil embargo and its recessionary effects put a strain on Saudi-US relations, but more than 50 years later, economic philosophies in both countries still revolve around the themes of oil and security. The 1990 Gulf War prompted the Bush administration to launch Operation Desert Shield, stationing US troops in Saudi Arabia to protect Kuwaiti and Saudi oil fields. Saudi oil and US weapons complement each other well.
As soon as the UN imposed an embargo on Iraq and Kuwait, Saudi Aramco, at the request of the United States, began increasing production to make up for the shortfall. The oil giant accelerated the implementation schedule of its crude oil expansion plans. Riyadh spent $4.7 billion to revive idled wells, drill new ones, and develop five offshore gas-oil separation plants. Production rose from 5.4 million bpd in July 1990 to 8.5 million bpd by December 1990. About 300,000 bpd was provided free of charge to allied forces. This action suppressed oil prices and strengthened US-Saudi ties.
To some extent, economics have trumped political motivations over the past five years. Riyadh is eager to reduce its reliance on oil and develop other sources of revenue. The lure of foreign financial participation prompted Saudi Arabia to sell shares in Aramco last week amid rapt investor interest, in an attempt to unlock its hidden value.
Saudi Arabia, the de facto leader of OPEC, has been closely monitoring production cuts within the oil cartel as it seeks to push oil prices above $85 to balance its budget amid rising supplies from other major producers such as the United States. In an effort to further tighten the market, the issue of “capacity assessment and utilization” has recently resurfaced, with three independent consultants commissioned to carry out a new audit. With a heavy reliance on oil revenues to drive economic policy, capacity estimation exercises have caused stress among peers before.
The implementation of the production curbs has prompted Angola to withdraw from OPEC in December 2023, citing its inability to tolerate curbs at a time of growing African oil dominance. This follows Ecuador and Qatar a few years ago. The UAE was at odds with Saudi Arabia earlier this year over production capacity issues. The Abu Dhabi National Oil Company recently reported on its website that it was increasing its maximum crude oil production capacity, and the country may seek a further increase in its quota. With oil accounting for 90% of the country's exports and a catalyst for Kuwait's Vision 2035 program, it will need a larger share as production increases at the country's three refineries.
Moscow is sitting on large crude stockpiles and lobbying for increased production amid dwindling processing capacity following Ukrainian attacks on Russian refineries. Increased production reported by Iraq and Kazakhstan, ignoring pledges to cut output, suggests cuts may be gradually reversed, stoking regional tensions.
Libya's El Sharara oil field in the Murzuk Desert, which has the largest confirmed reserves in Africa, was recently opened from closure. Any restrictions on Libya would hit the country's fractured economy. Investment in Nigeria's oil industry is lacking, but the recent partial start-up of the Dangote refinery near Lagos could affect the country's capacity utilization and quotas. The audit work was postponed for a year in an unexpected withdrawal, citing the ongoing Ukraine war as a deterrent against Russia. The move is seen as maintaining unity within the group.
Navigating the complex maze of economics and politics is a tough job. It's an election year, and Washington and Brussels are eager to keep energy costs low and frequently push for OPEC+ to boost production. So fuel prices remain crucial. But oil prices are rife with speculative intent.
American oil tycoon and investor T. Boone Pickens once said, “It's becoming cheaper to find oil on the floor of the New York Stock Exchange than to find it in the ground.”
(Opinions are personal)
(ranjantandon@live.com)
Ranjan Tandon | Senior Market Specialist, Author
