OPEC just had enough

OPEC+ has replaced the International Energy Agency as its secondary source for member production data with Rystad Energy and Wood Mackenzie. The news, broken by Reuters, which quoted an unnamed source from OPEC+, was the latest in a string of signals that OPEC — which makes up the bigger part of OPEC+ — is done playing to a foreign tune.

The oil cartel, which during the last oil downturn analysts argued was getting increasingly irrelevant in a world with inexorably rising U.S. shale oil production, seems to have had enough of other groups and countries telling it what to do. And it is striking back.

"First of all, I don't care what the IEA or others say. We are part of an organization, an alliance called OPEC+," Emirati energy minister Suhail al Mazrouei told S&P Global Commodity Insights at the Atlantic Council's Global Energy Forum in Dubai this week.

The assertion came in response to calls for higher oil output by the IEA and accusations that the UAE and Saudi Arabia were hurting the global economy by not deploying their spare capacity.

It also came in response to remarks by the IEA’s Fatih Birol that OPEC+ should show it was made up of “responsible players in the energy markets”.

"We have to do things as required by supply and demand,” Al Mazrouei went on to say on Monday. “So I would say we are going to do whatever we can as a group, not as individual countries, and we will give you that verdict in two days."

Earlier in March the IEA sounded an alarm that the global oil market was about to slip into a deficit as soon as the second quarter due to lost Russian barrels unless OPEC stepped in and boosted production. There is, the IEA said, no other source of additional barrels than Saudi Arabia and the UAE.

Let’s rewind now to the spring of 2021 and IEA’s “monumental” as one environmentalist think tank called it, roadmap to net zero. In that document, the IEA argued that investment in new oil and gas production would have to be ended by this year because the world won’t be needing so much oil and gas.

Saudi Arabia’s energy minister Abdulaziz bin Salman promptly called the roadmap “La La Land”. His Qatari counterpart, Saad Sherida Al Kaabi, said the euphoria surrounding the energy transition was dangerous, adding “When you deprive the business from additional investments, you have big spikes.” That was last June.

By October the same year, the White House was considering releasing oil from the strategic reserve to fight rising retail fuel prices and the IEA was calling on OPEC+ to boost production, apparently losing all recollection of its own roadmap and the argument that the world doesn’t need more oil or gas.

Then came the COP26 conference where large oil and gas consumers raced to outcommit each other on emission reductions. Biden’s SPR oil releases started and failed to make a lasting difference in petrol prices. Then Russia invaded the Ukraine and the West started pouring sanctions on Moscow. The oil-producing part of the East, meanwhile, kept quiet and distanced itself from outright public condemnations.

And then, after the latest series of calls for more oil, it appeared that OPEC had had enough.

"I think in COP 26 all the producers felt they were uninvited and unwanted but now we are again superheroes, it’s not going to work like that," the UAE’s Al Mazrouei said earlier this week, as quoted by Reuters. He then went on to explain that OPEC+ needed to replace some 5 to 8 million barrels of oil production daily just to keep output at current levels.

Separately, speaking to CNBC, Al Mazrouei said it was becoming increasingly difficult to maintain order on the oil market and boost production in line with demand.

“For that to happen, we need resources – financial resources – we need to invest and we need to decouple politics from energy availability and energy affordability,” he said.

“I’m worried that because we are mixing the two, we could end up in a situation where energy affordability becomes an issue and that would definitely lead ultimately to poverty, and ultimately could lead to a stagnation of the world economy. We are trying, but we cannot be blamed for everything – we are doing our best.”

The feeling that you are being “blamed for everything” is certainly not among the most pleasant ones. Add to this pressure from the U.S. to condemn Russia’s actions in the Ukraine and the unpleasantness increases. The latest comments from OPEC’s number-three seem to point to a certain growing frustration with all this pressure. And frustration, as indicated by OPEC’s behaviour, does not result in willingness to do what those exerting the pressure want you to do.

What’s more, it seems the cartel is coming closer together. Just like the West has been presenting a united front against Russia, OPEC is presenting an equally united front against, well, the West. Instead of ditching Russia, the de facto co-leader of the wider oil alliance, OPEC is signaling a determination to stay the course agreed with the newest geopolitical pariah at the inception of OPEC+. And that looks like one more sign that it has had enough.

Pragmatically speaking, IEA’s warning that as much as 3 million bpd of Russian oil for foreign markets could be cut off because of the sanctions should have been celebrated by other large producers. Less Russian oil means more market for Saudi or Emirati or Iraqi oil, after all.

Even better, it means continued high prices because even the Saudis and the Emiratis working together cannot squeeze out an additional 3 million bpd in a week or a month. Yet neither the Saudis nor the Emiratis have plans to offset lost Russian barrels. Neither, it seems, wants to be purely pragmatic, at least over the short term. Pressure can do this to you. So can strategic thinking.

Indeed, Reuters reported earlier this week, citing sources from Saudi Arabia, that Riyadh was wary of jeopardising its partnership with Russia on oil production. "The Saudis are careful," the Reuters source said. "They don't want to hike oil output above plan in order not to show they are against Russia."

Other sources that Reuters cited in its report, claimed the other reason for Saudi Arabia’s reluctance was its expectation of more support from the United States for its war with the Yemeni Houthis and security guarantees with regard to the possibility of a new nuclear deal with Iran.

This is unlikely to happen unless President Biden wants to go back on his campaign promise to end “Donald Trump’s “blank check” for Saudi Arabia’s human rights abuses at home and abroad and ending the war in Yemen.”

As The Washington Post put it in an article from this week, the bonds between the U.S. and the Gulf oil states have frayed because of “the administration’s failure to respond vigorously enough to ongoing missile attacks on their countries by Iran-backed Houthi rebels in Yemen, and its eagerness to sign a new nuclear deal with Tehran that does not address Iranian aggression in the region.”

In other words, what we have here is a trust issue. If you can’t trust your traditional allies whom you see as abandoning you in your hour of need, why would you do what they ask you to do in their hour of need? And there are those new allies that haven’t let you down yet and their track record in the region suggests they won’t do that any time soon.

OPEC+ is meeting today for its regular monthly review of oil production policy. No one in the audience seems to be expecting any surprises. The cartel remains committed to its original agreement to boost production by around 400,000 bpd monthly until its output returns to pre-pandemic levels.

OPEC+ is in no rush to save global oil markets from a shortage. It is also obviously not concerned too much about demand destruction brought about by excessively high oil prices. With all the billions in profits the cartel made from the post-pandemic demand surge, they really have nothing to be concerned about at this point. Not even the U.S. plan to release up to 180 million barrels of oil over several months or the IEA’s plan for another oil release.