By John Kemp
LONDON, Nov 26 (Reuters) – The Organization of the Petroleum Exporting Countries has been marginalised as critical decisions about the oil market are taken by a troika of the United States, Russia and Saudi Arabia.
The rise and subsequent fall in oil prices this year has been almost entirely driven by production decisions in these three countries and their policies towards managing the impact of renewed sanctions on Iran.
The troika accounted for 36 million barrels per day of crude and condensates production in 2017 (39 percent of the global total) compared with just 27 million bpd from the rest of OPEC (30 percent of the global total).
Troika production has surged even further this year as U.S. shale firms ramped up output in response to higher prices, while Russia and Saudi Arabia relaxed production curbs put in place at the end of 2016.
Output from the troika is the fastest-growing element in global oil supplies, which will likely push its share above 40 percent in 2018 while the rest of OPEC falls below 30 percent (“Statistical review of world energy”, BP, 2018).
Production decisions made in the troika tend to determine whether the oil market will be over- or under-supplied in the short to medium term, while other OPEC and non-OPEC countries watch from the sidelines.
The rest of OPEC is struggling under sanctions, mismanagement and unrest; is too small to matter; is maximising production rather than participating in output controls; or simply aligns its output policies with those of Saudi Arabia.
The only OPEC member that operates an independent production policy and has been able to increase its output significantly in 2017/18 has been Iraq.
In this context, it is not surprising that the distinction between OPEC and non-OPEC members has become increasingly blurred and decision-making shifted outside the organisation.
Discussion and analysis have moved away from OPEC’s twice-yearly ministerial conference to the Joint Ministerial Monitoring Committee (JMMC), which blends OPEC and non-OPEC members.
The JMMC contains two leading non-OPEC producers (Russia and Oman) and just four OPEC countries (Saudi Arabia, Kuwait, Algeria and Venezuela) plus the OPEC president (currently the United Arab Emirates).
The JMMC’s membership is a tacit admission that non-OPEC Russia and to a lesser extent Oman play a more important role in production policy than most OPEC members.
Dividing oil production into “OPEC” and “non-OPEC” has become an obsolete way of analysing the oil market. A better approach recognises a hierarchy of decision-makers with varying degrees of freedom and importance.
The inner core of decision-making consists of Saudi Arabia and Russia, which have closely coordinated their output policy during 2017/18, and act as the de facto leaders of OPEC and non-OPEC respectively.
Next comes the United States, which is not in OPEC and lacks a unified production policy, but has a decisive influence on oil supplies and prices through its rapidly growing shale output and sanctions.
Decisions about the severity of sanctions (including scope, enforcement and waivers) give the United States significant influence (less than Saudi Arabia and Russia but more than other OPEC and non-OPEC members).
The United States has acted as a third member of the troika even though it is formally forbidden by law from coordinating production policy domestically or with foreign countries.
Recognising their joint influence, policymakers from Saudi Arabia, Russia and the United States have regularly briefed one another about production decisions and sanctions in 2018.
And the president of the United States has expressed strong and clear views about the appropriate level of oil prices and exerted pressure on Saudi Arabia.
The third level of the hierarchy consists of OPEC members Kuwait and the United Arab Emirates and non-OPEC Oman, which have proved willing to adjust their production under Saudi and Russian leadership. The troika plus Kuwait, the UAE and Oman account for almost half of global liquids production.
The fourth level consists of Iraq, which has also to some extent coordinated its production policy with Saudi Arabia and Russia but retained much more independence.
The fifth and final level consists of all other OPEC and non-OPEC producers, which essentially maximise their output and are not part of the production control system.
In this hierarchical system, production policy is driven by initial consultations between Saudi Arabia and Russia, paying due attention to the diplomatic requirements and anticipated output reactions of the United States.
Kuwait, the UAE, Oman and later Iraq are then brought on board, followed eventually by the rest of OPEC and non-OPEC allies.
In this hierarchy, only Saudi Arabia, Russia and the United States are genuinely independent actors, while Kuwait, the UAE, Oman and Iraq are important followers.
Other OPEC and non-OPEC members are largely inconsequential in terms of decision-making and production outcomes.
Iran, which was a founder member of OPEC and its second-most important member through the 1980s, has been pushed out of the decision-making process by U.S. sanctions.
Iran’s exclusion from membership of the JMMC is symptomatic of its marginalisation within OPEC and the wider oil market.
DECISIONS OUTSIDE OPEC
In this new system, the locus of decision-making has shifted from the twice-yearly OPEC conference in Vienna to the periodic meetings of the JMMC and bilateral briefings among ministers.
In April/May 2018, Saudi Arabia and Russia took the critical decision to start increasing output in bilateral discussions held well before it was formally ratified by the OPEC conference and then non-OPEC countries in June 2018.
Under U.S. pressure, Saudi Arabia, backed by Russia, Kuwait, the UAE and Oman, decided to raise output further in September, again outside the formal OPEC framework.
Experienced observers expect the next round of critical production decisions will be taken, at least in outline form, at this week’s Group of 20 meeting in Buenos Aires rather than at OPEC’s formal conference next month.
Top political leaders from all members of the troika will attend the G20 with their senior economic and energy advisers.
“For the oil market, it looks like the real OPEC meeting will come a week ahead of schedule,” according to Javier Blas, chief energy correspondent at Bloomberg.
“The cartel is set to meet on Dec. 6 in Vienna, but days earlier the key decision makers are set to gather on the sidelines of the G20 summit,” Blas notes.
It provides an opportunity for leaders and their ministers to reach an understanding about the preferred direction of prices next year (“As oil plunges, the real OPEC meeting will be at next week’s G20”, Bloomberg, Nov. 23).
Oil policy is increasingly driven by the political and diplomatic priorities of Saudi Arabia’s de facto leader Crown Prince Mohammed bin Salman (MbS), Russia’s President Vladimir Putin and U.S. President Donald Trump.
The MbS-Putin-Trump triangle sets the political context, with operational decisions left to energy ministers and officials (“How strongmen play their cards will determine next move for oil”, Financial Times, Nov. 23).
As the balance of power has shifted away from historically important producers such as Iran, Nigeria and Venezuela, so the focus of decision-making has also flowed into new channels.
As power shifts to the troika and its closest allies, the OPEC conference and its OPEC/non-OPEC follow-up have become a theatrical stage rather than where the real decisions are taken.
(John Kemp is a Reuters market analyst. The views expressed are his own)