Fifteen months ago, the oil markets were in shambles. Oil prices had plummeted, and the economies of oil-dependent countries tumbled with them.
Today, Brent crude is consistently over $70 per barrel, projects are moving forward, and economies are emerging from recessions. Some are saying the Organization of the Petroleum Exporting Countries (OPEC) attained its goal with the production cuts announced in December 2016 — prices have rebounded, and the market has stabilized. Now critics, like U.S. President Donald Trump who called oil prices “artificially very high” last week, say the cuts should be over.
OPEC, however, is not so sure.
Saudi oil minister Khalid Al-Falih offered a potential new metric at the group’s meeting in Jeddah on April 20 — suggesting market stabilization should not be based solely on a draw-down of global stockpiles, but on the level of investment in future oil production capacity. OPEC, he asserted, needs “to promote confidence in the long-term market in order to attract capital, not to target price,” according to Bloomberg.
“The suggestion that they switch from using a metric that is a little bit out of date to one that bears little relation to market balance risks inflating short-term volatility too. Of course, while they seek stable oil prices that will last for decades, the OPEC+ group won’t mind a bit of short-term instability, as long as it drives prices upwards, not downwards,” says Julian Lee, an oil strategist for Bloomberg.
While much harder to measure, this metric is really a push for long-term stability in the oil markets. And like the landmark deal between OPEC and 10 non-OPEC member countries to cut 1.8 million barrels of oil per day from the market, this continued effort to achieve market stability will necessitate cooperation and coordination beyond what OPEC can muster internally.
For the first time since 2001, OPEC demonstrated a need for outside cooperation to steer oil markets when production cuts hinged on non-OPEC countries’ cooperation. OPEC’s need, combined with the sustained crash in oil prices, created a real opportunity for African countries to participate in a wider effort to stabilize the market.
Equatorial Guinea, with a daily crude production of just 2 percent of Saudi Arabia’s, was one of the 11 initial non-member countries that agreed to cut oil production in the OPEC-led initiative. By 2017 the country had joined OPEC as a full-fledged member. Gabon, with a similar production capacity to Equatorial Guinea, reactivated its membership in 2016.
This dependence on additional oil producers is expected to continue and is opening doors for African nations that have, up until now, lacked a voice on the global stage.
The Republic of the Congo announced its application to join OPEC in January. The country, which has achieved this year a production rate of 350,000 barrels of oil per day, was badly hit by the oil price crash — government revenue in the oil-dependent country fell by over 30 percent from 2015, and publicly-guaranteed debt rose to 110 percent of GDP. Currently seeking a bailout from the International Monetary Fund, Congo is determined to have a voice in the oil market and take a role in maintaining market stability.
“This imminent accession expresses the will of his (Congo President) Excellency Denis Sassou Nguesso to place our country in the rank of the world’s leaders,” said a statement from the Congo.
Uganda plans to seek OPEC membership in 2020 when its oil production comes online. South Sudan and Sudan both participate in the OPEC-led production cuts. Chad has also expressed interest in joining OPEC. Altogether, the cartel currently includes six African producers, four of which are from Sub-Saharan Africa.
For these countries, OPEC represents not only a voice, but access to potential investors.
The long-time members of the organization, such as Saudi Arabia and Iran, are also heavily explored and very developed. For OPEC, accession of African countries is an opportunity to snap up more market share, as well as create opportunities for international investment.
“For OPEC as a whole, more members, along with increased coordination with non-OPEC countries, lend legitimacy to the organization,” says Matt Piotrowski, Senior Editor at Securing America’s Future Energy. “Larger producers — most notably Saudi Arabia — can spread responsibility for price volatility and anti-competitive actions. Adding members — even ones as small as Congo, Gabon, and Equatorial Guinea — also incrementally increases OPEC’s market share.”
And the cooperation has proved successful, for both OPEC and for non-member countries. In April, OPEC announced it had achieved a 149 percent conformity rate of the voluntary production cuts for March, the highest level so far. The unexpected cuts came from countries like Venezuela and Angola, both struggling with declining production unrelated to the deal (political instability is largely to blame for Venezuela’s decline and aging production fields in the case of Angola).
In recent weeks, oil reached highs not seen since 2014. Analysts have high hopes for the oil price and market stability in 2018 and 2019. After the April meeting, the OPEC/Non-OPEC Joint Ministerial Monitoring Committee was ordered to look “into different metrics, with an in-depth analysis of addressing larger uncertainties in the market,” according to an OPEC press release. The committee has also been charged with finding additional means of strengthening the cooperation.
Because of the success of the production cuts, however, the deal must come to an end eventually. Though the deal was extended through 2018, analysts are speculating on the cartel’s exit strategy — an abrupt exit could send markets tumbling again, with countries like Russia holding reserves that could shock the market.
As the ministers representing both OPEC and non-OPEC countries head to Vienna for another meeting in June, talks of an exit strategy are likely.
Even as the need for an exit strategy makes headlines, OPEC Secretary General Mohammed Barkindo — previously Nigeria’s National Representative for OPEC and the Managing Director of Nigeria’s national oil company — has reinforced the need for cooperation, even extending an invitation of cooperation to the United States following Trump’s critical tweet.
“We do not have any price object, not as OPEC and not in this joint endeavor with non-OPEC,” said Barkindo. “Price is not our objective and our objective remains restoring stability on a sustainable basis and in the interest of not only us as producers but also us as consumers.”