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OPEC+ Cartel: The group that lost its way

The OPEC+ Cartel: The Group that Lost its Way

The first OPEC+ meeting of 2023 is scheduled to be held on the 1st of February with little fanfare. The delegates of the 23-nation coalition of oil producers will meet and decide on oil production outputs for every member nation. The proceedings typically yield in ayes all around to whatever’s planned by the Saudis and Russians who run the group because of their vast oil production outputs.

There are three published goals for the Organization of the Petroleum Exporting Countries, and its allies (OPEC+). The three are to coordinate and unify the oil policies of the different producing countries to achieve “fair and stable prices,” maintain “efficient, economic and regular supply,” to consuming countries and work toward getting “investors in the industry a fair return on capital.”

However, many have not seen this as the case because, over the past year, the member group has failed at one major goal, which is to achieve fair and stable prices.

The spokespeople of the cartel often mash those three ideals into one choice pursuit called “balance” during interviews. To them, the market is considered “balanced” when crude is trading at $100 a barrel or more, or at least above $90 (on Friday, U.S. crude settled at under $80 while Brent stalled at below $87). If oil gets to $200 someday, we can presume that it will be even “more balanced” in the cartel’s eyes.

This is because, in the six decades of OPEC’s existence, oil producers have been razor-focused on one thing and one thing only, higher oil prices. In practice, economic supply for consumers, which is one of the stated goals of OPEC+, isn’t possible because what’s economical to consumers simply isn’t to producers.

From the cartel’s viewpoint, consumers want the lowest price that would bankrupt oil companies and freeze investments in future production (those who argue against this should think of the minus $40 a barrel that U.S. crude got to, during the height of the pandemic). On the flip side, oil companies are now declaring record profits. But they’re still not investing in production, citing unfriendly government policies instead.

So, here we are, stuck over the definition of what balanced prices for crude should be. With the just-ended week being a disappointing one for oil bulls wishing to put the market into a higher trajectory after a dismal start for the year, hopes will be rising again that OPEC+ can do something in the coming week to “balance” the market.

In reality, it is quite obvious that OPEC+ is struggling to balance the market, not from external pressure but from within. Since early December, the Saudis have been beset with a new headache in the form of the G7 price cap on Russian oil, which has been producing all sorts of undesirable reactions in its closest ally Moscow.

The price cap has put a $60 ceiling on each barrel of Russia’s Urals oil. That is a discount of at least $27 a barrel to the latest settlement in the global benchmark Brent. In the real marketplace, the Russians are selling the Urals even cheaper, up to $30 a barrel or more under Brent, especially to Indian buyers, say trade sources.

Now, because they are getting less money for their oil, the Russians are also shipping out more barrels these days than the Saudis wish them to, with those barrels primarily going to two destinations – India and China, which are the only two nations the United States allows to buy sanctioned Russian oil without questions.

The increased exports from Russia are not only messing up OPEC+’s aim of keeping production tight but also hurting the Saudis as India and China are also the largest markets in Asia for Riyadh’s state oil company Saudi Aramco.

India bought an average of 1.2 million barrels of Russian Urals a day in December, which was 33 times more than a year earlier and 29% more than in November. Discounts for the Urals at Russia’s western ports for sale to India under some deals widened to $32-$35 per barrel when freight wasn’t included, according to a Reuters report from Dec. 14.

The Indians even exported fuel produced from Russian crude to New York via a high-seas transfer at one point, despite U.S. sanctions prohibiting the import of Russian-origin energy products, including refined fuels, distillates, crude oil, coal, and gas.

Another Reuters report said China paid the deepest discounts in months for Russian ESPO crude oil in December, amid weak demand and poor refining margins. ESPO is a grade exported from the Russian Far East port of Kozmino and Chinese refiners are dominant clients for this.

At least one ESPO cargo for early December arrival was sold to an independent Chinese refiner at a discount of $6 per barrel against the February Brent price on a delivery-ex-ship (DES) basis, Reuters said, citing four traders with the knowledge of the matter.

That discount compared with a premium of about $1.80 fetched by an ESPO barrel in China three weeks before the deal. Brent’s plunge to a one-year low of just above $75 by Dec. 9 exacerbated the discount for Russian crude, though the U.K. crude’s rebound to $87 since has narrowed some of that difference.

If that wasn’t enough, yet another Reuters report from Friday said Russia’s oil loadings from its Baltic ports were set to rise by 50% in January from December levels. Russia loaded 4.7 million tonnes of Urals and KEBCO from Baltic ports in December.

The January surge comes as sellers try to meet strong demand in Asia and benefit from rising global energy prices, said the report, which became the single biggest reason for Friday’s slump in crude prices that turned oil into a losing bet for January.

The Saudis, on their part, have slashed pricing on their Arab Light crude to Asia to try and stay competitive amid the ruthless undercutting by the Russians, who are supposed to be their closest ally within OPEC+.

Riyadh is also attempting to talk to Moscow, with Saudi Foreign Minister Faisal bin Farhan Al-Saud telling a Bloomberg interview recently that the kingdom was “engaging with Russia over keeping oil prices relatively stable.” He further stated, “We have a very important partnership with Russia on OPEC+ … that has delivered stability [to] the oil market … we are gonna engage with Russia on that.”

But on the same day that the Saudi minister spoke, some 1,600 miles away in Ashgabat, the capital of Turkmenistan, Russia’s Deputy Prime Minister Alexander Novak was telling state news agency Tass that Moscow “is not discussing with OPEC+ the possibility of its oil production cuts.”

Novak was responding to a question on whether the Kremlin will reduce oil output to demand a higher price for its Urals crude as the G7’s $60-per-barrel cap allows buyers to lowball the Russian product versus rival crude benchmarks such as the U.K. Brent, U.S. West Texas Intermediate, the Arab Light and Dubai Light. Novak emphasized, “No, we are not discussing such issues.”

It showed the two nations having different ideas on what they needed to do at this point; The Russians needed to sell as much oil as possible and at whatever price they can. The Saudis want to keep Arab Light competitive against the Urals but not flood the market; hence their plan for a rollover in December production targets.

This then calls into question whether or not the OPEC+ is actually following its mandate of what it is supposed to do, or if the cartel is now running like the wild west, with many of the nations now focus on self-interest. The concept of “balance” is now being called into question as the term is now obviously subjective to whatever situation the big players find themselves playing.

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