A feared worst-case scenario of open conflict breaking out in the Persian Gulf appeared to be buried on Tuesday, as the OPEC+ alliance agreed to extend oil production cuts through March 2020.
The decision by oil kingpin Saudi Arabia and non-OPEC heavyweight Russia followed a string of potentially destabilizing events in and around the Strait of Hormuz, through which 20% of the world’s oil supply passes.
“The geopolitical concern is behind us,” said John Sfakianakis, chief economist at the Gulf Research Center in Riyadh.
There were three key incidents “concerning for the oil market” over the past two months, he told Asia Times.
In mid-May, Riyadh said it was forced to shut down a pipeline connecting the country’s oil-rich east to a Red Sea port after two pumping stations came under attack by armed drones. Yemen’s Iran-allied Houthi rebels claimed responsibility for the attack, which Saudi Energy Minister Khalid al-Falih called “an act of terrorism and sabotage” against the global oil flow.
Then came a June 13 attack against two tankers laden with petroleum products off the coast of Oman, suspected to be a calculated Iranian warning to the Gulf monarchies against strangling its oil exports. A week later, Iranian forces shot down a US drone which Tehran said was flying over its airspace.
In the wake of that event, US President Donald Trump said he came to the brink of ordering a strike on the Islamic Republic, but pulled back to avoid casualties, with his administration stressing that it was not seeking war.
OPEC and its partners appear to have taken Trump’s word as gold.
“We’re over with that for the time being. There has been no other major event,” said Sfakianakis of the assuaged Gulf tensions.
No Trump tweet
The extension of the cuts, in place since 2017, was expected by all parties, according to Manouchehr Takin, an international oil and energy consultant based in London.
“It was a so-called rollover. Everyone expected it. The whole market has discounted for it … it has been working and people are happy,” he told Asia Times.
Russian President Vladimir Putin went so far as to reveal the extension from the sidelines of the G20 in Japan over the weekend, following talks with Saudi Crown Prince Mohammed bin Salman.
The statement, made before OPEC ministers in Vienna, irked the Iranian representative, whose country is struggling to find outlets for its supplies due to US sanctions.
Iranian Minister of Petroleum Bijan Zangeneh told reporters on Monday that while he approved of production cuts in principle, the decision should have been discussed between all members first – not announced in such a presumptuous way.
“The main challenge to OPEC is unilateralism. The members need to discuss and decide together,” Zangeneh was quoted by Iran’s Shana news agency as saying.
Takin, who served on the OPEC secretariat during the tumultuous years of 1981-1990, says the indignation of Tehran – a founding member of the cartel – was a call for order more than a sign of fractures in the six-decade alliance.
“I don’t think it’s really material for them at this point. They’re confronting the sanctions, so whatever they produce they’ll have to store it and wait and see who buys it,” he said.
The consultant also shrugged off the past two months of Gulf tensions and rivalry between Saudi Arabia and Iran: “When I was working in OPEC in Vienna it was heat of the Iran-Iraq war, and yet the ministers from those two used to come to Vienna and they would talk. They would not hug, but they would have serious discussions.”
The current political tensions are not serious, Takin said, predicting that OPEC will survive because it benefits all involved: “That’s why Russia joined.”
The cuts are also acceptable to Washington, designed to maintain current price levels rather than drive them up.
“Trump was concerned about oil at $70 but now we’re at $65,” said Sfakianakis. “Oil at $65 or thereabouts is good for both sides. The OPEC and non-OPEC countries, as well as the shale producers, as well as the consumer.”
The US president has aided stability by declining to escalate against Iran. “Had he escalated, the price would have spiked substantially,” he said.
While Trump has intermittently railed against OPEC over alleged price gauging, the economist says he does not anticipate a Trump tweet this time.
Hours after OPEC+ announced it would continue to curb oil supplies on Tuesday, the price per barrel did not jump, but actually dropped 3.44% to $62.82 for Brent crude as of 11pm BST.
That was despite news of the cuts, the onset of the summer – a heavy driving season, and major producers like Venezuela and Iran being crippled by US sanctions. “Imagine without the agreement” what the price could have dipped to, mused Sfakianakis.
Shale at the table
The OPEC+ meeting comes four months after the International Energy Agency forecast the cartel’s output capacity would shrink by 2024 due to declines in Iran and Venezuela, while it would face increased competition from US shale.
In March, the agency’s executive director was quoted by Bloomberg warning that the “second wave of the US shale revolution” was on its way.
“US shale oil and gas has been a thorn in the side of OPEC for the past five-six years (…) the amount of oil added every year to US production through shale oil has been tremendous. I think 4-5 million per day,” said Takin.
OPEC, he notes, previously tried to drown out the potential of shale by flooding the market and driving down prices to the point where fracking and other new technologies like horizontal drilling would become prohibitively expensive.
While some of the small, aggressive companies investing in shale went bankrupt, many others survived, especially those bought up and backed by major companies like Exxon.
“Science and technology cannot be put out. They continued with innovative methods, and operationally they became gradually more efficient,” Takin said, noting that some companies can break even as low as $40 per barrel.
“In the past few years shale production has become mature and efficient.”
In turn, OPEC is now treating shale as another supply in the world market to factor into its projections.