Monday’s announcement by Qatar that it is leaving OPEC does not spell the end of that organization, or really do it much harm. But, coming as it does on the heels of the recent 30% drop in global crude prices, the meeting of the OPEC nations that began in Vienna on Wednesday represents a crucial moment for the global oil industry. As it has for most of the past two years, the OPEC+ alliance holds many of the cards that will influence crude prices in the coming months, and how they play those cards will impact producers and consumers alike.
As I noted earlier this week, Qatar has not really been a major player within OPEC, a reality that has caused its leaders a good deal of frustration, which is likely part of the reason for this week’s sudden decision. Qatar is also not one of the larger producers in the organization, ranking as its 9th-largest producer per the most recent data available.
Qatar’s real future is in its huge and growing Liquefied Natural Gas (LNG) export business, and the country’s minister, Saad Al-Kaabi, pointed to a desire to focus more efforts and capital on that as the main reason for his country’s decision to abandon OPEC. Al-Kaabi also expressed frustration that his country did not have stronger influence in determining the cartel’s policies, saying, “We are a small player and I don’t think that our voice counts.”
A strong case can be made that the cartel, due in large part to its OPEC+ alliance with Russia, Mexico and other exporting countries, has never been stronger or more effective than it has been for most of the last two years. But the group significantly misjudged market conditions and the extent of U.S. sanctions on Iran over the past two months, resulting in another supply glut. The Brent price dropped by more than 30% during October and November as a result.
All of which is why it is important to everyone involved in the global industry for OPEC and its non-OPEC partners to agree to further cuts at this week’s meetings in Vienna. A failure to do so, as Iran’s minister noted yesterday, would likely send crude prices deep down into the $40s.
Entering this week’s meeting, Saudi Minister Khalid Al-Falih told reporters that his country supports a fairly modest cut in overall OPEC+ exports of roughly 1 million barrels of oil per day. That level of cuts frankly doesn’t appear to give the roiling oil markets much comfort, given that both Brent and WTI were down by about $1.50/bbl in early trading on Thursday.
Al-Falih also appeared to take a fairly hard line on his country’s willingness to disproportionately contribute to a new round of cuts, saying that “If everybody is not willing to join and contribute equally, we will wait until they are.”
With Brent hovering near $60 and WTI around $51, a failure by OPEC+ to reach a deal to extend export controls into 2019 for any period of time is not a happy prospect for oil producers anywhere. This is especially true in the shale plays of the United States, where break-even points for many drilling prospects are already being approached.
These are tense days for the oil business. But then, when is that ever not the case?