The recent Opec meeting delivered a 1.2 mb/d oil cut starting from January 2019, and the Saudi-Russia alliance looks stronger than ever.
The 5th Opec+ meeting has concluded on Friday with the unanimous decision of cutting oil output by 1.2 mb/d starting from January 2019, for an initial period of six months.
Opec countries will count for 0.8 mb/d and non Opec countries for 0.2 mb/d of the total target.
The decision was far from being an easy one, as tensions between Saudi Arabia and rival Iran threatened an agreement.
The brokering of Russia has allowed to agree on an output cut larger than the one of 1mb/d expected from the market.
Oil Market 2.0: a New Polarized Reality?
This meeting has been the crystallization of the changes that have been shaping since the first output deal in December 2016.
Negotiations started with Saudi Arabia and Iran opposed and apparently incapable of finding a common ground, with the former unwilling to make concessions to its long-term rival, and the latter playing the role of the victim of the reimposed US sanctions.
The agreement has been possible thank to the intervention of Russia, that in separate meetings with Iran and Saudi Arabia has brokered a deal that makes everyone happy, almost everyone.
Saudi Arabia has managed to get a significant output cut, necessary to push prices up and balance its budget.
Iran has obtained the exemption from the cut for the time being, given that its oil export is already curtailed by US sanctions.
Russia has secured itself a leading position in determining the decisions of Opec+, together with historical leader Saudi Arabia.
The cooperation between Saudi Arabia and Russia has started as a temporary arrangement in 2016 to face specific contingencies.
Since then it has evolved into a stable alliance, a duopoly that goes beyond the Opec’s scope.
Saudi Arabia however has been moving on a fine line, trying to increase oil prices, and avoid spoiling its relation with the US.
President Donald Trump, that hadn’t failed to put pressure on Opec to keep the spigots open and prices down, has been disappointed.
The decision to remove 1.2 mb/d from the market pushed prices upwards.
Brent rose by 2.9%to $61.70 a barrel before the agreement and to $63.73 immediately after it, passing the threshold of $60 a barrel.
Changing Dynamics, Beyond Opec
A few days before the meeting Qatar has announced its decision to leave Opec.
This will not have a severe impact on prices, as Qatar produces a little more than 600.000b/d and has very little spare capacity.
However, the announcement comes at a challenging time for Opec.
Despite Qatar declarations that the decision comes from its willingness to focus on gas rather than oil, and not as a form of retaliation for the blockade led by Saudi Arabia, the decision has been interpreted as asign of the growing weakness of Opec and lack of cohesiveness.
Another interesting change regards Canada, that hasn’t been involved in the Opec+ decisions until now.
The province of Alberta, strong in the production of oil sands, has announced an unprecedented cut of 325.000 mb/d to support prices.
Playing It By Ear
According to the usual Opec schedule, the next meeting should be in June.
However, it has been anticipated to April, when the cuts will be reviewed.
The role of many actors is changing and alliances are evolving to form new configurations.
It is safer to play it by ear.