Complex Made Simple

New OPEC+ alliance gives oil cartel global production power, but is it all for naught?

Despite its best efforts, OPEC may have no control over oil prices even as it extends oil cuts and adds to its alliance new oil producing countries

Concerns over faltering demand continue to swirl in the markets, exposing oil’s downside Saudis see U.S. shale growth slowing down Fortified by Moscow and other cooperating non-members, OPEC+ once again controls most of the world's crude oil supply

OPEC just regained the upper hand on oil production, after losing majority edge to non-OPEC producers, especially after the US became the world’s no.1 in that category.

But can the cartel control prices to regulate supply and demand and protect its interests?

To start off, OPEC agreed to maintain cuts and keep 1.2 million barrels per day (mbpd) off the supply side.

Oil cuts to 2020 

OilPrice.com reported that oil prices surged over the weekend on news that the U.S. and China would restart trade negotiations, ending, for now, a tariffs war.

“OPEC+ also agreed to extend the production cuts, going a long way to head off another surplus. However, oil markets were unimpressed on Tuesday and fell back in early trading over demand fears,” It said.

Han Tan, Market Analyst at FXTM says Brent futures are now up 0.6% to trade at $62.78/bbl at the time of writing, while WTI crude is higher by 0.5% at $56.55/bbl, slightly blunting Tuesday’s steep drop as US inventories reportedly fell by some 5 million barrels last week

Prices by OilPrice.com earlier on Wednesday

The production cuts were extended for 9 months, or till the first quarter of 2020.

Tan says concerns over faltering demand continue to swirl in the markets, exposing oil’s downside. “Investors have yet to buy into the OPEC narrative that keeping the supply cuts at current levels for the next nine months will be enough to rebalance global markets,” he said.

The Vienna Alliance

The New York Times (NYT) reported that on Tuesday, OPEC, Russia and other oil-producing nations signed what they described as an open-ended “charter of cooperation”, known as the Vienna alliance, which still needs to be ratified by participating governments.

These are 24 countries that together produce about 47 million barrels of oil a day (mbpd), or almost half the world’s output

“It grew out of an effort, led by Saudi Arabia and Russia, to formalize two and a half years of coordinating oil output to bolster prices amid a surge in production, notably from shale drilling in the US,” said the NYT.

Read more: Economy, production cuts, shale worries, prop up oil prices

OilPrice.com said Saudis see U.S. shale growth slowing down.  “I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history,” Saudi oil minister Khalid Al-Falih told reporters at OPEC’s Vienna headquarters.

Russia had an average output of 11.5 million barrels a day in 2018, third after Saudi and the US.

Related: A new world order taking shape: Could OPEC play second fiddle to US’s oil boom?

“Russia’s increasingly close alliance with OPEC, and with Saudi Arabia specifically, could change the geopolitical dynamics of the oil markets while raising eyebrows in the United States,” the US paper said.

Russia has agreed to cut 230,000 barrels a day while Saudi has cut its output by 320,000 barrels a day, and is currently producing around one million barrels a day less than it was in late 2017.

OPEC has been cutting its output almost steadily since the end of 2016.

“The main result has been a gradual loss of its market share to shale oil operators in the US and others outside OPEC, including Russia,” said NYT.

New and improved OPEC+

Khalid Al-Falih, the Saudi oil minister, called the move "historic.”

The charter "has created one of history's strongest producer partnerships, spanning the entire world from east to west," he said Tuesday. "Our objectives related to market stability are now matched by the horsepower needed to deliver them."

After the US became the world's No. 1 oil producer, OPEC found itself controlling less than 50% of the world's crude and watched as oil prices dropped.

Read more: The NOPEC legislation and the potential OPEC retaliation

“Fortified by Moscow and other cooperating non-members, OPEC+ once again controls most of the world's crude oil supply,” said NPR.

Iran is the ‘odd man out’ and has accepted the OPEC+ production cuts, as well as the Vienna alliance, albeit after threatening to boycott or not formalize it.

OPC suffers important weak links in its production value chain from Venezuela's production woes to U.S. sanctions on Iran, and security issues in Libya.

This is while the U.S. and other non-OPEC producers can ramp up production very quickly, thanks to new drilling technologies related to shale oil extraction.