Environment

OPEC+ oil producers head into meeting with quota unease and geopolitical risks casting a shadow

Saudi energy minister Abdulaziz bin Salman on Oct. 5, 2022.
Bloomberg | Bloomberg | Getty Images

The influential Organization of Petroleum Exporting Countries and its allies, collectively known as OPEC+, convene to decide next production policy steps on Thursday, in a postponed virtual meeting overshadowed by conflict in the Middle East, internal disgruntlement and the imminent expiry of a key Saudi supply cut.

All eyes have turned on whether the OPEC subset of the group — steered by heavyweight Saudi Arabia — will have mended its differences, after sources told CNBC that Angola and Nigeria objected to lower baselines for next year. Baselines, levels off which cuts and quotas are decided, have been a bone of contention within OPEC+, stalling talks amid UAE pushback in the summer of 2021.

Angola and Nigeria have struggled with declining output amid underfunding, spare capacity depletion and infrastructural sabotage. But accepting lower baselines would pose risks in the event of future output recoveries. The two countries’ baselines for 2024 — and implicitly their production quotas — were due to be studied following assessment from three independent data providers.

Two OPEC+ delegates, who could only speak anonymously because of the sensitivity of discussions, told CNBC Tuesday that a compromise had yet to be reached, as the clock ticks toward key meetings between OPEC, OPEC+ and their technical committee.

The gatherings were initially scheduled as in-person meetings last weekend in Vienna, before a last-minute downgrade to virtual conferences. Their new date overlaps with the first day of the 2023 United Nations Climate Change Conference (COP28) hosted by key OPEC member the UAE, which is trying to raise its profile as a champion of the green transition.

Beyond internal strife, OPEC+ has been contending with a perceived disconnect between prices and supply-demand fundamentals, which has frustrated the group — including Saudi Energy Minister Prince Abdulaziz bin Salman, who warned market speculators they should “watch out” in May.

Last week, three OPEC+ delegates stressed recent oil prices were pressured by liquidations in a tight future markets, while a fourth delegate said that prices are now shaped by global politics, including developments in Gaza.

OPEC+ members already have a 2 million barrels-per-day production cut in place, compounded by 1.66 million-barrels-per-day voluntary declines from some members. Both were agreed until the end of 2024.

Topping this, Saudi Arabia and Russia instituted respective supply drops of 1 million barrels per day and 300,000 barrels per day until the end of this year. These drops fleetingly boosted prices that languished amid high interest rates and banking turmoil in the first half of the year, but gains have since retreated, given a fragile recovery in China and political uncertainty in the Middle East.

One of the aforementioned delegates said that OPEC+ would have to make a policy announcement to “support the market,” while another delegate suggested cuts could be discussed. But a different delegate assessed it is unlikely that the coalition will change course, acknowledging uncertainty over Iran and Venezuela, where the U.S. signaled tightening and easing its oil sanctions, respectively.

Further cuts could stir dormant tensions with the White House, which prefers prices low at the pump but has stayed silent since a war of words with Riyadh last year. U.S. calls for additional production could conflict with Washington-endorsed efforts for global solidarity around decarbonization at COP28.

Oil spill

OPEC+ and broader markets face uncertainty whether the conflict between Israel and Palestinian militant group Hamas would spread into the Middle East, echoing the crisis of 50 years prior that resulted in several Arab countries restricting oil exports to the U.S.

Two OPEC+ delegates said the coalition would not politicize production, with one of the sources noting that the embargo of 1973 was decided by the Organization of Arab Petroleum Exporting Countries.

Riyadh’s tone against Israel, reined back by U.S. efforts to normalize relations between its two allies, has slowly sharpened, with Saudi Crown Prince Mohammed bin Salman now urging countries not to provide Israel with weapons. Iran’s supreme leader Ayatollah Ali Khamenei’s calls for an Islamic oil embargo against Israel have so far gone unheeded — and Iran’s sanctioned status has heavily reduced its influence in OPEC+ diplomacy.

Tehran’s own crude flows are themselves under long-term question. Amos Hochstein, White House energy security advisor, told Bloomberg TV that the U.S. will now enforce oil sanctions against Iran amid the resurgent Middle East war, noting of Iran’s oil exports, “Those numbers will come down.”

Separately, Libya voted to strengthen a law criminalizing relations with Israel, turning away a vessel from loading crude locally because of a previous voyage to Israel, a Libyan shipper told CNBC. A separate decision by Yemen’s Houthi to hijack a cargo ship on suspicion of Israeli connections and label all tankers owned by or dealing with Israel as a “legitimate target” dampens the security of popular oil routes in the Red Sea.

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