Oil price hike imminent; OPEC stability under pressure: opinion

For now, it seems that Trump may need to change his Tweets from anti-OPEC to a more conciliatory approach. “Make America great again” should become “Make oil and gas great again.”

It’s no secret that Algiers OPEC meeting has not produced the outcome consumers and US President Trump had been hoping for. After a weekend of internal discussions and meetings between OPEC and Russia, the leading oil producers stated that no production hike is to be expected soon.

Saudi Minister of Energy Khalid Al-Falih and his Russian counterpart Novak already said they would not bend to pressure to increase production to counter higher prices. Both also reiterated to the press that OPEC and non-OPEC are more than capable to counter growing demand.

This optimistic message was supported by higher production volumes being reported by Iraq, Libya, while Russia said it was able to increase production by hundreds of thousands of barrels on short notice. Saudi Arabia still maintains an available spare production capacity sufficient enough to keep its role as swing producer.

Still, the overall optimism in the media defies reality. The facts on the ground are showing an increasingly tightening market, where demand is still growing, supply struggling, and the oil cartel is heading for a real showdown with some of its founding members, Iran and Venezuela. The ongoing discussions between Saudi Arabia, UAE and Russia to set up a formal agreement for a new oil cartel, NOPEC, have also put the old guard under pressure.

The diffuse outcome of the OPEC–non-OPEC meeting in Algiers has not provided any support to the oil market in reality. Stability— the key issue that traders, producers and consumers are looking for—is under pressure, as shown by the Iranian refusal to even attend. Instability will be a key factor in the coming months. Short-term optimism will not be able to quell long-term concerns.

OPEC’s unilateral ability to control the global oil market has come to an end, as current NOPEC discussions and the continuing impact of US shale are showing.  A total restructuring of the cartel is ongoing— even though some founding members, such as Iran or Venezuela are still resisting. Tehran and Caracas have, however, been sidetracked. Their influence at present is only via international media. The real power brokers are in Riyadh, Abu Dhabi, and Moscow.

This triumvirate is calling the shots, heading to a new OPEC structure, which Russia and maybe some new FSU producers will be part of. The political, economic and security cooperation being built within the Saudi-Emirati-Russian alliance will decide the future goals and structure of OPEC 2.0 or NOPEC.

For the global oil market, the impact will be immense. Even though US shale, supported by Trump and others, has been instrumental in changing part of the market, real power is still in the hands of the old (conventional) guards. 

The OPEC meeting outcome, fully rebuffing Trump’s threats and requests to increase production to counter higher oil prices, shows that Washington is currently not calling the shots, but only a Twitter factor able to move prices upwards in the whole constellation. A real NOPEC approach will form an alliance capable of not only influencing oil markets, but in principle having a full-fledged geopolitical impact on energy too.

In the short-term, the only way for oil prices seems to be up. Fundamentals show that demand is increasing, despite the US-China trade war and financial issues in emerging markets, which can put a dent in the growth.

Meanwhile, supply is showing severe constraints. Prices in the coming months and years will feel the negative repercussions of lagging investments, as indicated by OPEC over the last few days. The oil cartel expects that $11 trillion is needed in upstream investments until 2040. This immense volume is not available at present, however. The impact of renewables, electric vehicles and the carbon bubble, are making investors wary of investing in hydrocarbons. OPEC and Russia will not be able to induce the $11 trillion needed without cash constraints.

At the same time, spare production capacity will now be stretched to the limit. Without Saudi Arabia, Russia and others to produce additional volumes on short-term notice (within 30 days), Iranian sanctions and supply outages (Libya, Venezuela, Iraq or Nigeria) will surely push prices above $100 per barrel. Oil traders Mercuria and Trafigura are already warning of this, supported by the facts on the ground.

With instability in OPEC and Moscow playing its own cards, oil supply is not going to increase sufficiently to meet demand. Price hikes are imminent, with the implementation of Iranian sanctions and possible regional conflicts only pushing prices up further.

Possible stability will only emerge if the ongoing discussions lead to a strong NOPEC configuration, able to attract investments and providing confidence in spare production capacity. The latter is at present not available, as Saudi Arabia is stretched to the limit, and others are struggling. 

Cyril Widdershoven is a geopolitical and oil & gas analyst covering the Middle East and North Africa region, as well as Turkey. He is the founder and director of Verocy, a Netherlands-based consultancy.