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WITH three crude oil production cuts and another one on the way from next month, there are new challenges facing OPEC+, as the oil prices are still staying stubbornly below $75 per barrel. Nothing seems to be moving oil prices up, despite the various analytic predictions about higher oil prices this year. The disunity in OPEC+ after the last meeting set the direction of many differences in opinions, which resulted in Saudi Arabia taking the sole decision of cutting its own production by one million barrels per day within the coming few days.
Moreover, Russia has almost refused any cuts and reductions in its production level, as it is in desperate need for foreign cash fl ow in any form, regardless of the value of its Ruble. What matters for it is to continue selling its crude oil and maximizing its income without losing the market share. Some members reached their limits for making any further production cuts, while others were asking for future increases in production and quotas. Strange as it sounds but compromises come in many forms. Hence, the last meeting of OPEC+ was not easy, as it may lead to further frustrations and cracks in the unity of the organization.
On the face of it, it should have been an easy and smooth session. Where do we go from here with just six months left for the year to end, and with most OPEC+ members facing huge deficits in their year end budgets. This forces them to search for alternatives to borrow, against last year’s expectation for oil prices to remain strong, which will lead to higher spending and expenditures.
On one hand, Russia just cannot cut or risk its production volume, or the foreign currency income. It will sell the maximum volume regardless, as it is a matter of national security. It is not prepared to face domestic consequences, and hopes to be back and reach a compromise with OPEC later. Some other members complained of not achieving the targeted volume of the agreed quota because of a dispute on border fee with Turkey, as in the case with Iraq, thereby losing revenues of close to 200,000 barrels per day. African oil producers were told to commit themselves to a fixed production volume without any room for compromise.
The last Vienna meeting was not healthy, as it ended with a cracked and copy-paste agreement, and with the majority going their own ways, leaving Saudi Arabia with a huge burden of solely reducing production by one million barrels per day starting from July 1, to await the oil market’s reaction the following Monday. The current global economic conditions, with concerns about overgrowth in China and the strong US currency, certainly will not help, and will not lead to growth in demand. In addition, the higher interest rates are damping any hope of price recovery, which may force an extension of the Saudi production cuts into the second month.
We must remind ourselves that the USA is the main beneficiary of the current oil situation, making it easier for it to fill its strategic reserve at the earliest. Division or split in OPEC+ is perhaps not a bad thing today, as all members are seeking ways and means to minimize their losses. Certainly, borrowing or digging into their savings, and delaying mega projects seem to be the alternative choices. The uncertainty surrounding the oil markets is making it difficult for OPEC+ members to come together as one united front.
By Kamel Al-Harami
Independent Oil Analyst
email: [email protected]
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