OPEC’s New Game

SEATTLE (Oil Monster): The FIFA World Cup, intended to showcase friendly competition between nations, is of course a hotbed of intense rivalries.

Russian President Vladimir Putin and Saudi Arabia's Crown Prince Mohammed bin Salman oversaw proceedings in Thursday’s opening game. Meanwhile, by a stroke of luck, Iran enjoyed late success on Friday. The US, which along with Canada and Mexico won the bid to host the event in 2026, is not on the field but comments from the sidelines. All this makes it much like Opec.

The Saudi Arabian oil team’s problem today is too much winning. The market has tightened significantly as the eventual result of their policy of production restraint. They have been assisted by continuing strong worldwide demand and by the collapse in Venezuela, then by the prospect of lost exports from Iran as the US moves to reimpose sanctions.

Prices hovering around $80 per barrel conjure the spectre of demand destruction, and diplomatic pressure from US President Donald Trump’s anti-Opec tweets and from other major customers such as India. After strongly supporting the US decision to leave the nuclear deal with Iran, Riyadh is now looking to prevent the oil price getting out of control.

After he and Mr Putin assembled an all-stars team of Saudi Arabia, the UAE, Russia, Iran, Iraq, Venezuela, Oman and other leading producers, Prince Mohammed spoke of a “10 to 20 year agreement” for oil market management. It remains to be seen whether production restraint is the right way to play for the long-term, but with threats from surging US production and the rise of electric vehicles, some kind of far-sighted strategy is needed.

Few of the "Opec+" group can raise production significantly – only Saudi Arabia, the UAE, Kuwait, Russia and, given a deal with the Kurdish region on pipeline access, Iraq. Iran feels cheated; having agreed to some production restraint after it emerged from the Obama-era penalties, it now faces losing market share to its rivals again. Exports were down sharply in early June, as South Korean, Turkish and European buyers cut shipments, perhaps in anticipation of sanctions.

Both Tehran and Caracas, also under (milder) American sanctions, object to Opec policy being made in response to US demands, and reducing prices at their expense. Venezuela, historically hopeless at football, is not doing much better at oil production. Its output may dip below 1 million barrels per day shortly, a humiliating fall for Latin America’s once-titan. Libyan oil production is threatened again by fighting at its ports.

In the short term, there is not much Iran, Venezuela, Libya or other declining producers such as Qatar, Angola or Algeria can do if the stronger members go it alone on raising production. Sanctions on Iran might prove ineffective, political change in Venezuela might restore its output, or global recession may hit demand.

 Courtesy: www.thenational.ae