A short and productive November meeting saw OPEC+ quickly trot out a series of eloquently crafted messages which emphasized that, in spite of rising oil prices and short-term growth demand, the group would be holding firm to its current production plans.
Each communique chimed soundly with the chief cheerleader Saudi energy minister Abdelaziz bin Salman Al Saud’s (AbS) lengthy exposition of the meeting where he made it clear OPEC+ would only increase production by 400kbd per month – as agreed in July – and resist the pressure from the US or other major consuming countries to pump more.
AbS argued that because global demand will ease off and inventories start to fill in December and Q1 of 2022, the market will find a natural balance to serve interests of producers and consumers alike. And he cautioned that, as economic headwinds in 2022 and the COVID-19 Delta variant continue to pose a threat to growth, flooding the market now would be folly.
Saudi Arabia and OPEC+ sticking to their guns in this way not only irks the Biden administration but also gives the US cause to consider a strategic petroleum reserve release. The kingdom – and crown prince Mohammed bin Salman in particular – have rejected the perfect opportunity to assist the US and put aside some of the differences separating the two.
Practical reasons not political
Although AbS appeared to feel a sense of satisfaction in delivering this news now – not only a time when the kingdom is coming under mounting US pressure to respond to rising prices at the pump but also during COP26 where oil producing states and ‘energy’ majors are being hauled over the coals – it is easy and misleading to attribute the OPEC+ decision and in particular Saudi Arabia’s role in reaching it to ‘schadenfreude’.
The real factors that led to the decision comprise little-acknowledged production constraints amongst some OPEC members, a desire to keep the group in harmony following several earlier rocky meetings, and Saudi Arabia’s unwillingness to move the needle for the US unless the Biden administration brings something substantive to the table.
It is widely known that Nigeria and Angola – following years of underinvestment, domestic political wrangling, declining fields, and persistent delays to much-needed upgrades and repairs – are unable to meet their allocations.
Angola self-reported a decline in production of 19kbpd between August and September, with total production in September at 1.110mbpd, far from OPEC+’s required 1.392mbpd by December. And secondary sources report a decline of approximately 70kbpd in Nigeria’s production from September to 1.37mbpd in October, due to sabotage attacks against its key pipeline. OPEC+ requires Nigeria to reach production of 1.666mbpd by December, a stretch for the African country given the operational setbacks facing its industry.
Meanwhile, Kuwait, one of the bulwarks of OPEC, is struggling to meet its own allocation – although it did increase production in October and almost hit the mark of 2.51mbpd, achieving this in the coming months will be a challenge. In addition, although not subject to the OPEC+ deal, Libya’s production remains volatile and risks leaving holes in supply so, on closer inspection, OPEC+ is collectively struggling to reach its targets in accordance with the July deal.
Given these production challenges, it is not surprising OPEC+ decided to stick with the plan, even though just a few months ago the UAE would have been chomping at the bit to soak up additional allocations. In fact, Abu Dhabi has increased production by 70kbpd to 2.84mbpd and, for the time being, with high oil prices and being in de-escalatory mode, its leadership seems content to ride things out.
But that will likely change as the same structural factors which gave rise to Abu Dhabi’s discontent remain and frustration will once again start to build. Nevertheless, Riyadh demonstrated in July it is in no mood to countenance opposition within OPEC itself and will use its might to keep the organization in line and aligned with OPEC+ members, especially Russia, Mexico, and Oman. At the same time, it is content to produce over 10mbpd by December, earning the kingdom a handsome windfall to help push through Vision 2030.
Balancing the market with the politics
Although the reasons behind OPEC+ deciding to stick to its guns are largely rational and economic, they do not account for Saudi Arabia’s own political calculation which must have weighed heavily on the shoulders of both AbS and MbS, even though the former’s masterful appearance before the press after the meeting gave nothing away.