Why OPEC is a relic of the past

  • A nine-month extension to production cuts
  • Russia’s profile rises
  • Output policy now depends on a triad of the leading producers

 

The international oil cartel met on July 1 and 2 at its biannual meeting in Vienna, Austria. Before the meeting, the oil minister from the most influential member of OPEC, Saudi Arabia, said that his country would like to see Brent crude oil in a range from $60 to $70 per barrel. 

Trades issues that threaten the global economy and the rising tensions in the Middle East are pulling the price of the energy commodity in opposite directions. 

OPEC is not the influential body that determines the international price of crude oil anymore. The United States now produces over 12 million barrels per day, and Russia is one of the three leading producers. Two of the three world leaders are not members of the cartel, making it a toothless tiger. Meanwhile, OPEC attempted to shift the power balance back in its favor at the most recent meeting. 

 

A nine-month extension to production cuts

The price of crude oil went into and came out of the meeting within the price range that is the sweet spot for the Saudis. 

 

 

 

 

 

 

 

 

Source: Barchart

 

The chart illustrates that last week, the active month September Brent crude oil futures contract that trades in the Intercontinental Exchange traded in a range from $62.07 to $66.74 per barrel and closed last Friday at just over the $64 level. Brent is the benchmark pricing mechanism for most OPEC members and two-thirds of the world’s petroleum. 

Since the price of Brent futures slipped from a high at $75.59 per barrel in April, it was no surprise that the members of the cartel agreed to extend the 1.2 million barrels per day production cut at their meeting. The only surprise was that the members decided to formalize its relationship with Russia with a partnership charter. 

The Russians have been involved in OPEC production policy since early 2016 when the price of petroleum slipped below the $30 per barrel level. Russia bridged the divide between the Saudis and Iranian who have been arch-enemies in the region for years, to engineer a production cut that lifted the price of oil from the lows. 

The news of the extension for the next nine months came as no surprise as Vladimir Putin and Saudi Crown Prince Mohammed bin Salman leaked the information at the G20 meeting the weekend before OPEC ministers gathered in Vienna. 

 

Russia’s profile rises

Russia’s involvement in OPEC production has been growing over the past three years. At the late 2018 meeting, the oil ministers could not agree on a final level for an output but until Russian oil minister Alexander Novak and President Putin mediated to come up with a 1.2 million barrels per day cut to the previous production quota when the price of oil was on its way to the lows late last year. Russia agreed to participate in the cut and over the years has bought lots of goodwill with the other members of the cartel. 

Without Russia, OPEC would have absolutely no power these days since the US is now the world’s leading oil-producing country. The partnership agreement with the Russians serves to preserve at least some of the cartel’s influence when it comes to the path of the price of the energy commodity. 

 

Output policy now depends on a triad of the leading producers

In reality, OPEC is a relic of the past. The price of oil is now under the control of the three leading producers. Oil is one of the most political commodities in the world as more than half the reserves are in the Middle East. The US sanctions on Iran and recent retaliation when it comes to attacks on tankers, missiles flying from Yemen into Saudi sovereign territory, and an attack on a US drone near the Strait of Hormuz have increased supply risks for crude oil exports from the region. 

Oil is a market with lots of vested political interest. The US administration has not been shy about its desire for more output from the Saudis and allies in the Middle East to keep the price of oil under control. The situation with Iran has only increased US pressure to increase production. Russia and the Saudis would prefer a higher price but realize that would only encourage even more oil to flow from the US. The political nature of the commodity means that there are likely lots of behind the scene influence peddling between Washington, Moscow, and Riyadh these days. 

President Putin and the Crown Prince of Saudi Arabia already knew the verdict of the OPEC meeting before the ministers sat down at the table on July 1, and it is likely that President Trump also was aware of the outcome of the meeting before it occurred. 

OPEC is now nothing more than a trade organization with Russia pulling the strings, and the US exerting influence through its relationship with Saudi Arabia. 

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About the Author 

Andy Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories.  Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.  Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.


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