By Julian Lee
A little over a week ago I wrote that oil producers need a mechanism allowing them to respond quickly to changes in the oil market that could be both big and fast. I’m pleased to see that’s what they’ve tried to create, even if it isn’t quite what I had in mind.
My colleague Alaric Nightingale suggested the OPEC+ alliance should assemble a small SWAT team that could take swift, tactical action. Instead, it has decided to mobilize its entire army as the rapid-response unit.
It did so at the end of another week of fractious meetings, which concluded with a signature OPEC+ compromise that its 23 members could all sign on to. The group, which includes Saudi Arabia, Russia, Iraq and the United Arab Emirates, agreed to raise its collective output by 500,000 barrels a day from Jan. 1.
So far, so good. It wasn’t the three-month delay to raising output that markets had been expecting, but neither was it the imminent return of 1.9 million barrels a day envisaged under the deal struck in April. Then came the kicker: For the foreseeable future, the oil ministers will meet during the first week of each month to decide on subsequent action — all 23 of them. This after they’d only just shown us how unwieldy that can get. Let’s hope this doesn’t become a roadmap for these new monthly powwows.
Monday’s virtual gathering of the 13 OPEC ministers broke up without agreement, the bigger OPEC+ meeting was delayed by two days and then by another two hours as the start time approached. The intervening days and hours were used for a sort of virtual shuttle diplomacy to try to find a deal everyone could accept.
When the full OPEC+ meeting finally did get underway on Thursday, it was chaired alone by Russia, long an OPEC foe until recently. Saudi Arabia’s Energy Minister Prince Abdulaziz Bin Salman had made good on his threat to relinquish co-leadership of the group. But there’s more than one way to read that decision. Either as the petulant reaction of a man who couldn’t get his own way, or as a deft diplomatic move to create the environment needed to ease tensions and allow a compromise to be reached.
The prince is a seasoned diplomat who’s been credited with orchestrating many past Saudi successes at OPEC as assistant oil minister under both Ali Al-Naimi and Khalid Al-Falih. I prefer to believe his action was intended to help reach an agreement, especially given Saudi Arabia had really wanted to delay any increase in production targets.
BloombergThe whole week was an intricate, exhausting song and dance. The prince himself characterized it as “very excruciating.” It seems unimaginable that they really want to subject themselves — and oil markets — to that every month. They would have done better to devolve the monthly adjustments to a smaller group of members, perhaps using the existing structure of the Joint Ministerial Monitoring Committee, a group of seven ministers that oversees the OPEC+ accord but currently has no power to make policy.
There would of course be howls of protest that output levels are sovereign decisions that shouldn’t be given up, but the SWAT team’s mandate could be very tightly worded along the lines of the deal they just struck. Its monthly meetings would serve to examine market conditions and decide the following month’s production target, which would be applied on a pro-rata basis with a maximum change in either direction of 500,000 barrels a day. An automatic sunset clause could end the arrangement when the total volume added to supply reaches 2 million barrels a day, the amount originally at stake in April’s accord.
It’s not as if OPEC doesn’t have form. Back in March 2000, the group introduced the automatic price band mechanism, which triggered changes of 500,000 barrels a day in overall output quotas when prices strayed outside a $22-$28 a barrel range on a 20-day average basis.
These are exceptional times. Oil demand could move rapidly in either direction depending on the impact of the coronavirus, the need for lockdowns and the relief provided by vaccines. This unpredictable landscape will call for unusual nimbleness on the oil producers’ part. While OPEC+ has in a sense heeded my call (we can all dream), it remains to be seen if the solution will really produce the rapid response required, or leave the group bogged down in one fractious meeting after another.
Tune in next month and everyone thereafter to find out.