David Blackmon is a Texas-based public policy analyst/consultant.
At the recent CERAWeek conference in Houston, executives of U.S. oil companies warned that crude prices would probably move higher with the resurging influence of the OPEC+ cartel over international oil markets. ConocoPhillips CEO Ryan Lance predicted that "OPEC's market share probably grows from like 30 per cent today to somewhere closer to 50 per cent. The world is going back to what we had in the '70s and the '80s unless we do something to change that trajectory."
Pioneer Natural Resources CEO Scott Sheffield remarked "I think the people that are in charge now are three countries -- and they'll be in charge the next 25 years. Saudi first, UAE second, Kuwait third."
Those and other comments made by oil executives recently look prescient today in the wake of the announcement by OPEC+ that its members would be implementing up to 1.16 million barrels of oil per day (bopd) in additional production cuts starting May 1. As if to prove Sheffield's foresight, the three biggest contributors to the reductions are Saudi Arabia (500,000 bopd), the United Arab Emirates (144,000) and Kuwait (128,000). This latest round of cuts follows prior reduction pledges totaling 2 million bopd announced by the cartel last October.
Noticeably missing from the list of member countries committing to the new cuts is Russia, although the Putin government did announce in February that it would reduce its exports by 500,000 bopd.
In past years, the U.S. shale industry could have been expected to quickly ramp up production in response to the prospect of higher prices, as it did throughout the period from 2009 through 2019 when U.S. Shale had arguably become the swing producer on the global market. But constraints on capital influenced by the ESG activist investor groups, ongoing supply chain muck-ups, pipeline capacity constraints, shortages of steel and other raw materials and a tight labor market pretty much ensure that can't happen in the current political and market environment.
Saudi Arabia has always taken the lead on big cuts among the OPEC and OPEC+ groups. The Saudi Kingdom is the big dog in this cartel, along with Russia. But unlike Russia, the Saudi economy is in strong enough shape to forego the short-term revenues until prices rise. And rise they will. In fact, they already have, with the international Brent benchmark up by almost 6% in early Monday trading.
This move by OPEC+ to stabilize oil markets, as one spokesperson put it, comes at perhaps the worst time of the year for U.S. consumers, just as refiners are having to make the changeover from manufacturing a handful of winter blend gasolines to formulating several dozen summer blends in compliance with EPA haze regulations. It is also the time of year when a high percentage of refining capacity is offline for annual maintenance, with the advent of summer driving season just around the corner, bringing with it the higher gasoline and diesel demand that always comes about in late spring. All of these factors annually put upward pressure on gas prices at the pump.
The move is a stark example of OPEC+ flexing its market muscle, and another in a series of indicators of the fading of the relationship between the U.S. and Saudi Arabia. The move is clearly at odds with U.S. efforts to cut into Russia's oil revenues via the sanctions regime being imposed in response to that country's war on Ukraine. While America's allies in NATO and the European Union have signed onto and consistently expanded the sanctions, few if any OPEC+ members have chosen to participate in them, diminishing their intended impact.
A spokesperson for the U.S. National Security Council responded to the OPEC+ announcement by saying "We don't think cuts are advisable at this moment given market uncertainty - and we've made that clear." Unfortunately, it has become fairly clear that neither Saudi Arabia nor OPEC+ as a whole possess much regard for the Biden administration's advice.
Since its formation in 1960, the influence of OPEC over global oil markets and prices has ebbed and flowed. Throughout its 63-year history, however, OPEC and, more recently, the expanded OPEC+ have possessed the consistent ability to coordinate major production cuts designed to force oil prices higher, at least temporarily. Sunday's announcement represents another in a long line of such efforts.
Whether this latest grab for higher crude prices will have some staying power remains to be seen. But the recent predictions made by Sheffield, Lance and other non-cartel oil executives, along with overnight warnings from many analysts of $100 oil on the horizon indicate a growing general belief that they will.
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