Deferred meeting of OPEC+ points to dissent in the oil cartel

The deferral of the planned OPEC+ meeting in Vienna this weekend is an indication that there is something less than unanimity within the cartel as to how its members should respond to a slump in oil prices over the past two months.

Despite an aggregate 5 million barrels a day of OPEC+ oil cuts since last year, the oil price has tumbled to just over $US81 a barrel after peaking at $US98 a barrel in late September, and traded as low as $US77 a barrel only last week.

The meeting scheduled for this weekend was expected to consider further production cuts of as much as another million barrels a day. Its rescheduling to next Thursday suggests there has been pushback from some members of the cartel.

Despite production cuts, the oil price has tumbled to just over $US81 a barrel after peaking at $US98 in late September.Credit: AP

There are reports that Angola and Nigeria are among the key dissenters. Both of them had their production quotas lowered earlier this year because their output was below the previously agreed levels.

Nigeria in particular, however, with its domestic conflicts and insurgencies easing, has been lifting its volumes and is now producing about 300,000 barrels a day more than at the same time last year, or about 36,000 barrels a day above the level envisaged by June’s agreed production constraints.

Other OPEC+ members like Iran (which isn’t subject to production constraints), Iraq and Venezuela have also been increasing production, and the United Arab Emirates, which threatened to walk away from an OPEC+ meeting in June over the production caps, is on the verge of an agreed 340,000 barrels a day increase in its production limit from the start of 2024.

By deferring this weekend’s meeting, OPEC’s secretariat has bought time for the cartel’s members to get to the compromise the body always tends to seek to avoid displaying its dirty linen publicly.

Even Russia, which volunteered a 300,000 cut to its output earlier this year in tandem with a similarly voluntary reduction of a million barrels a day by the Saudis, produced about 20,000 barrels a day more in October than it did in September.

Indeed, in October, total production from OPEC+ was at a six-month high and about a million barrels a day higher than in August. Discipline within the cartel, along with its influence over oil prices, appears to have weakened.

Exacerbating the supply-side issues OPEC+ is grappling with is an increase in the production of non-OPEC+ producers. The US, Brazil, Canada and Guyana have lifted their output and are helping supply to run ahead of demand, which has been weakened by the slowing of China’s growth rate and the economies of some European countries.

Both the US and China have recently been adding to their inventories, another indication that the market is over-supplied.

Since Russia’s invasion of Ukraine, China and India gorged on Russian oil that was being traded below the G-7’s $US60 a barrel price cap on Russia’s exports, building significant stocks in the process. It provided them with something of a buffer as the oil price soared briefly towards $US100 a barrel in September after the Saudis and Russia vowed to maintain their voluntary cuts until the end of the year.

China’s oil inventories have continued to build as its economy has slowed. With its outlook for next year more muted even than this year’s, that suggests that it could be a reduced source of demand in at least the near term.

By deferring this weekend’s meeting, OPEC’s secretariat has bought time for the cartel’s members to get to the compromise the body always tends to seek to avoid displaying its dirty linen publicly.

It is hard to see the Saudis, who are bearing the vast majority of the production cuts, being prepared to unilaterally accept another significant reduction in their output.

Prince Mohammed bin Salman’s massively expensive projects, designed to reduce the kingdom’s exposure to a commodity with a finite life in a decarbonising world, do have to be funded.

Saudi Arabian Crown Prince Mohammed bin Salman: Most analysts think the Saudis need a price above $US80 a barrel to finance his bold projects.Credit: Reuters

Most analysts think the Saudis need a price close to $US100 a barrel and certainly above $US80 a barrel to finance the building of the bold/unusual new cities he plans and other ambitious initiatives like the hosting of the 2034 football World Cup or the creation of LIV Golf.

As for Russia, oil is its lifeline, the major source of income to finance its invasion of Ukraine.

With the US and other G-7 countries recently acting to try to enforce their price caps, Russia’s oil exports have – with the help of a “grey armada” of tankers it has assembled – increasingly been able to circumvent the sanctions the West imposed on them. It will want to maximise its output while it can to continue to fund a war that isn’t going according to plan and sustain an economy increasingly devoted to that war effort.

A possible compromise might involve the Saudis and Russia extending their voluntary cuts into 2024, with other members agreeing to quite modest reductions in their output ceilings to offset what is expected to be even weaker demand in the first quarter of next year.

There are some OPEC+ members – most likely Iran, Kuwait and Algeria – which might be prepared to contribute to significantly lower production levels to make a statement about the war between Israel and Hamas in Gaza.

Another spike in oil prices would send a none-too-subtle message to the Biden administration at a sensitive time with the start of the US election cycle, while also potentially adding to the unrest in other regions by creating a new source of discontent among communities in Europe and elsewhere already unsettled by the Middle East conflict.

The Saudis, who were on the verge of normalising relations with Israel before the attack – and gaining a closer security relationship with the US in the process – may be less enthusiastic about weaponising the oil price and further unsettling a less-than-friction-free relationship with the US.

In the past, they have used their status as the cartel’s swing producer to threaten to increase their output and swamp the market if others within OPEC+ don’t agree to reduce their production.

At present, the Saudis are producing about 9 million barrels a day, against their capacity of about 12 million barrels a day. They’ve done more than their share of the heavy lifting to try to keep a raised floor under the price.

While softer demand for oil in a weakening global economy may mean that, for the first half of next year at least, any decrease in OPEC+ volumes agreed to next week might not force prices up materially, the rest of the world is already wary of the potential for the combat in Gaza to ignite a wider regional conflict that, beyond the terrible human and geopolitical consequences, could also cause oil prices to soar.

With inflation gradually deflating in the major economies, central bankers and economic regulators – and politicians – are wary of anything OPEC+ might do that causes petrol prices to soar and send those inflation rates back up again.

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