In an Aug. 30 statement on the management of oil supply, the Organization of Petroleum Exporting Countries sounded confident. The Joint Ministerial Monitoring Committee (JMMC), it said, “expressed overall satisfaction with the collective performance of member countries in the month of July 2018.” Formed to oversee the coordination of production in effect since January 2017 by 12 OPEC members and 10 nonmember collaborators, the JMMC also “expressed its satisfaction with recent market fundamentals showing good balance between supply and demand considering seasonal factors.” And in an understated nod toward historic success, the committee said its next meeting, Sept. 23 in Algiers, will review “a framework of cooperation to be established in 2019 and beyond.”
For that, OPEC and its partners will have to continually manage change.
Evolving forces
Nineteen months into an agreement involving 22 disparate countries, the 109% compliance rate claimed by the JMMC for July is impressive, helped though it was by the collapse of Venezuelan production. Yet forces—internal and external—shaping cooperation have evolved.
Especially important are motivations of the two most important participants, which have changed since formalization of the production accord late in 2016. Then, the government of Saudi Arabia needed to finance sweeping economic reform while its financial reserves shrank in an oil-price slump. To raise funds, it planned an initial public offering of 5% of Saudi Aramco, the success of which depended strongly on the price of crude. Riyadh needed to make supply management work.
Only partly because it did so, Saudi finances have improved greatly. The government also is thought to have extracted more than $100 billion from wealthy Saudis incarcerated last winter and spring in an ostensible crackdown on corruption. That’s about what it hoped to raise from the Aramco IPO—a target many analysts consider unrealistic. Less desperate for immediate funds now than it was in 2016, the government can explore other financial strategies. Among those are direct investment in Aramco by foreign governments and purchase by Aramco of the 70% state interest in Saudi Basic Industries. Meanwhile, the IPO has been delayed—again and perhaps indefinitely. As noted earlier in this space, Riyadh has acquired options unavailable to it in 2016 (OGJ, Mar. 19, 2018, p. 22).
For the other crucial production-cutter, Russia, the prominent change since 2016 is resumption of economic growth in 2017. The rate is modest, however, still strongly dependent on the crude price and capped by sanctions expanded by the US.
Moscow has had to impose domestic sacrifice while it spends money on military adventures in Ukraine and the Middle East. An increase in the value-added tax rate is due in 2019. And scheduled increases in pension ages recently provoked demonstrations in several cities. President Vladimir Putin softened the pension blow in an Aug. 29 speech, showing that even he worries about the escalating political tension. Because near-term oil revenue must remain the priority of Russian decision-making, Moscow has little room to maneuver with oil production. Russia thus differs importantly from Saudi Arabia, with which relations are newly flirtations but likely to remain strained by its alliance with Iran.
Outside threat
From outside, meanwhile, OPEC and cooperating producers face a threat that in late 2016 was merely a possibility suggested by political rhetoric of the US presidential election. On several fronts and to so-far varying degrees, President Donald Trump has instigated the trade war that he once claimed to be easy to win. Until he validates the boast—if that’s possible—oil producers in and out of the supply-management agreement must account for the possibility of a slump in the global economy and therefore in demand for oil and natural gas. As new variables go, this one is especially potent.
Having once again demonstrated its dependence on supply management, the oil market has reason to welcome the JMMC’s intention to extend supply management beyond 2019. It should recognize, however, that the essential cooperation derives from forces always in motion.
