Oil guru sees OPEC dissolve if deal fails

Shaybah, the base for Saudi Aramco's Natural Gas Liquids plant and oil production, 2016 © Ian Timberlake
The nearer the OPEC November 30 deadline draws, the more critical its decision gets. In fact, it may well be a case of life or death for the once-reigning oil cartel.

The expert who predicted the 2014 price downturn, Gary Ross, told Bloomberg recently that if OPEC wants to regain its relevance for global oil markets, it needs to get all its members to join the party. Failure, on the other hand, would likely ring in the end of the OPEC era and a major reshuffle in oil markets as the members of the seemingly divided cartel strike out on their own.

Gary Ross is executive chairman of PIRA Energy Group, which is now a unit of S&P Global Platts. Known for his accurate predictions, Ross is a very popular energy industry analyst. Earlier this year he reinforced this opinion by accurately predicting that prices will bottom out and move up from the February trough of sub-US $30 a barrel.

But you don’t have to be a Gary Ross to see that things are not looking up for OPEC. At the start of this week, oil prices did rise a bit, reflecting the return of some optimism regarding the production cut agreement, but the success of this agreement continues to be highly questionable. The markets are capitalizing in the fluctuations, and is reflexive of that, rather than an overarching faith in OPEC.

Let’s recall what the foundations for the agreement are: as one OPEC source told Bloomberg, Saudi Arabia insists on four conditions. These include that all members of the organization agree to the measure; that they share the cut “equitably”; that they implement the market rebalancing measure in a transparent way; and that they do it in a way that helps OPEC regain its credibility.

Now, the source added that the latter could be ensured by using secondary-source production figures for each member, but that’s a point of contention between Saudi Arabia and Iraq. If the Saudis agree that Iraq could use internal figures, credibility would suffer.

Also, there is the issue of exemptions, which nullifies the “equitability” factor. So far, two OPEC members have been granted exemption from any production freezes or cuts on the grounds of lost market share. Nigeria and Libya are wasting no time to regain this market share by building production.

More on Oilprice.com: Iran Nears Pre-Sanction Levels, Starts Pumping Oil At 3 New Fields

Libya is pumping 660,000 bpd and is planning to restart exports from the biggest oil port in the Oil Crescent, Es Sider.

Nigeria is producing around 2 million barrels daily right now, despite renewed militant activity in the Niger Delta, and has bold plans to raise this to 2.8 million tons by 2019.

Outside OPEC, Russia is pumping at record-high rates, Brazil has stated it will not be joining any production cuts, and basically nobody wants to joint OPEC’s effort, no matter what they say at official events.

It looks like OPEC is well on its way to losing its international relevance. According to Ross, however, the group will reach an agreement, “when push comes to shove”. Iraq and Iran might relent and accept secondary-source production figures, after all. Russia might decide to put its production where its mouth is and join a freeze.

However, at these production rates, the effect of the freeze/cut is likely to be insubstantial, bar a temporary uptick in prices on the “good news” alone. The global glut is still very much real, and let’s not forget that the freeze/cut is being negotiated to last for 12 months. All OPEC members may not be able to cope with a production curb of this duration.

This article was originally published on Oilprice.com