OPEC AND THE WORLD OIL MARKET
One of the most important and unexpected events for the oil industry in
2016 was the decision by OPEC to cut production. At the meeting on
November 30, 2016 the cartel agreed to reduce production by 1.2 million
barrels per day. Ten days later non-OPEC countries joined the pact by
announcing a further decrease by 558 thousand barrels per day.
OPEC cuts production for the first time since 2008. The last coordination with
countries outside OPEC was 15 ago.
On January 1 the agreements officially came into force. Due to these
commitments the global oil supply is expected to shrink by 1.7-1.8 million
barrels per day by the middle of 2017. This will accelerate the U-turn on
the global oil market and stabilize prices.
Previously very few market participants believed in OPEC’s ability to stem
oil price decline. During the last two years the organization was literally
written off the oil map and sent to the dustbin of history. Many spoke of
oblivion, destruction or the beginning of end for OPEC. For example, in the
middle of precipitous oil price decline, Igor Sechin, CEO of Rosneft, said
that OPEC had ceased to exist and lost control of the oil market. Joe
Barton, Chairman of the Energy Committee in the US House of
Representatives, opined that cartel is toothless when it comes to dictating
the price of oil.
“We [the US] killed OPEC, it [OPEC] no longer exists.”
Chairman of the Energy Committee in the US House of Representatives Joe Barton
Вопреки ожиданиям и прогнозам, государствачлены ОПЕК продолжают влиять на
конъюнктуру мирового нефтяного рынка.
Obituaries about OPEC appear with consistent regularity.
This is
especially true when oil prices hit the bottom and panic kicks in. However,
after each market crash OPEC becomes stronger. Contrary to the
prevailing view, the organization between 2014 and 2016 has strengthened
its position on the global energy landscape. Several reasons attest to this
argument.
First, due to the record increase in oil production, OPEC has maintained a
dominant position in the global oil market. According to the data from the
US Energy Information Administration (EIA), the cartel in 2016 reached a
historic output of 32.5 million barrels per day, an increase of 7% compared
with 2014. BP estimates the cartel's present market share at 40-42%.
Second, geographic enlargement of OPEC. In 2016 membership in the
organization resumed Indonesia (later suspended again) and Gabon. As a
result, the composition of OPEC has increased to 13 countries.
Collectively OPEC member-states control more than 80% of global crude
oil reserves.
Third, strategic renewal of OPEC’s leadership. It is no secret that the de
facto leader of OPEC is Saudi Arabia. The kingdom’s energy minister
traditionally acts as a chief strategist and the main "conductor" for the cartel
in the oil market. On May 7, 2016 Khalid al-Falih became a new Saudi
energy minister. In this position he succeeded Ali al-Naimi, who held this
job for over 20 years and represented a conservative generation of OPEC’s
leaders.
Young generations of leaders have taken key roles in OPEC
Khalid al-Falih
Ali al-Naimi
Fourth, OPEC has won the “shale battle” with the United States. During
the past two years the main goal of OPEC was squeeze out American
shale oil producers from the global oil market. OPEC’s strategy was partly
successful. For example, from June, 2015 to December, 2016 US shale oil
production decreased by roughly 10%.
Furthermore, falling oil prices reduced the number of drilling rigs in the US
by 67% in 2016.
Moreover, according to the recent data from Bloomberg, the US oil & gas
sector has a record number of bankruptcies (liabilities over $500 million).
In the last year alone 20 American oil & gas companies filed for Chapter
13.
Fifth, creation of a “coalition” with major oil-producing countries outside
OPEC to balance the oil market. Over the past few years the global energy
landscape has undergone dramatic transformation. Global warming, geopolitical events, technological advances, and slowdown in the world
economy have had a significant impact on the global energy market. The
changing nature of the international energy landscape forced OPEC to
modernize, abandon archaic business models, and devise a new effective
system for steering the oil market. Under these conditions, OPEC
members have been able to overcome internal differences and form an
alliance with oil-producing countries outside the cartel to bring the global oil
market into balance1.
In conclusion, OPEC as an organization has not ceased to exist. The
cartel has successfully adapted to the new realities of the global energy
market. The crisis of the transition period will soon be over. The future of
OPEC, in my opinion, very accurately describes Nietzsche: “That which
does
not
kill
us
makes
us
stronger”.
1
At the time of writing OPEC and Non-OPEC countries were 90% in compliance with the global oil pact.
Analyst
Rafael Zhansultanov
Rating Agency of the Regional Financial Center of Almaty
Tel.: +7-727-224-48-41 (ext. 7206)
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E-mail: [email protected]
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