The JMMC, Joint Ministerial Monitoring Committee,
meeting of the OPEC+ that
ended inconclusively on Friday has added yet another anxiety to the beleaguered
oil sector, when it can least afford to take the additional burden upon itself.
The issue has arisen from the fact that the UAE,
United Arab Emirates, wants to change the baseline from which the cartel’s production
cuts are calculated.
The UAE has been arguing about that being very low –
3.17 million bpd for the Emirates; it wants it to be at 3.84 million bpd. Some
of the members, most probably those at the highly influential end, do not
appear to be agreeing with that.
A deal could have been struck, if members agreed not
to extend the production cuts that came in the aftermath of the pandemic beyond
April, 2022.
Since the members could not compromise on that
either, there was no common agreement by Friday evening and the talks are going
to resume on Monday; there is no guarantee that the issue will be resolved next
week, though.
If it is not resolved on Monday, it is a serious
fissure in the OPEC+ that always used to come out during troubling times as a
unified front. The nature of a fissure, however, is that could heal by itself
or can grow into something far bigger and more serious, leaving the organisation
on a damaging hinge – at the mercy of rapidly-changing global political
currents.
As far as the OPEC+ is concerned, on one hand, the
rise in crude oil price has put the producers under tremendous pressure,
perhaps as never before. On the other hand, they have to balance the books,
having suffered for years owing to falling prices, when the main form of
revenue came from the same commodity.
On top of that, the producers have been cornered and
singled out by the environmental movements for polluting the atmosphere by
selling fossil fuel in ever-increasing quantities, despite that being in direct
proportion to the universal demand from the world.
The OPEC+ that accounts for over 50% of global oil
supply was dealt a severe blow by the Coronavirus pandemic: the sale of oil
plummeted along with the price; on April 20, 2020, the price of crude oil even went
negative for the first time ever in its history and for months the price
remained so low, leaving the producers in a destructive loop.
The countries that could afford extra storage
capacity did cash in on the situation by buying oil by the truckload at rock-bottom
prices, a spectacle that the beleaguered producers could only watch from the
vantage point of despair and helplessness.
Although the price of crude oil made a relative
recovery before the end of 2020, only a handful of producers could breathe a
sigh of relief, because the cost of production has never been a level playing
field.
In 2021, the price of crude oil has risen by over
50%. The demand in the US and Europe is reaching the pre-pandemic level. In Asia,
one of the fastest growing regions in the world, however, the new variants of
the Coronavirus is causing mayhem again. Therefore, the OPEC+, prefers cautious
approach to substantial increase in daily production; Saudi Arabia has been maintaining
this position for months.
There are, however, nations which want to sell more
oil to compensate for the past losses, despite being constrained by the rigid
guidelines of the OPEC+, often brought about by the blessings of the more
influential players of the organisation. This must have been an irritant for
the weaker nations.
The ‘rebellious’ move by the UAE shows the
frustration by some member of the OPEC+ when they cannot sell enough. Most of
these countries, if not all, have been expanding their production capacities
not to store in silos, but to sell and earn revenue. They are fully aware of the
potential glut in the event of an over-supply.
If the sanctions against Iran are lifted, Iran may
trigger off another ‘rebellion’ – a more serious one - by insisting on having a
larger quota on the grounds of compensating for what it lost due to sanctions
during the past three years.
These are the very challenges that the OPEC+ is
going to face in the near future. If they are not tackled skilfully, the very
pillars that the organisation was built on may see more fissures, which could
potentially develop into irreparable cracks.
