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The Narrowing Options for OPEC+ - Barış Sanlı

OPEC may outlast the age of oil. The joy and chaos it brings to energy news streams are exceptional. The oil itself has the elements of a drama. It makes riches and wars. It creates winners and losers, erupts protests, changes governments. We sometimes personify oil like a man with evil deeds and riches. However, it may be no different than a simple power game.

This week OPEC JMMC and later OPEC+ will gather to tweak production targets. The problem lies in the data. Is the world getting back to normal, is the demand finally taking off? Or is it still too early to increase production? Or the price levels are a gift for shale producers?

The oil price volatility is generally calmed if some entity has control over oil markets. Otherwise, the normal tendency of prices is a little bit less than chaotic. Trump previously brokered or helped to broker an agreement between Russia and Saudi Arabia. OPEC+ and a US president have brought long stability to the oil prices for better or worse. Now, will it last?

One of the important elements of this equation is the stock levels. These stock levels, especially US oil stocks, were targeted by the OPEC decision-making. If stock levels are lower than average, it is obvious that demand is higher than the supply provided. But it also means that stockpiles have to be filled again at some time in the future.

This may be important for data-wise transparent US oil stockpiles. But the Chinese stock levels are not accurately known. China is estimated to have over 1 billion barrels of stocks. China has become an important balancing piece of the whole oil conundrum. Not only for what it consumes but also for what it can store.

The New US administration is also shifting the focus from oil to the energy transition. It will take time, but the ship has started maneuvering. The oil consumption itself has inertia, but the electric car frenzy has started. These kinds of policy shifts hardly happen in one go. But once it started, it will strengthen and then weaken and then strengthen further. There is no linear path.

The most curious question is related to shale production. Will there be capital discipline, or are we going to see the same drama of keep pumping. I am not sure about capital discipline, and if there is profit to be made, it will materialize, unfortunately, with a time shift.

OPEC is in a fallen angel's dilemma. It still has the control and prospects for oil markets. But it is eroding, and it can not be undone. Only a few geopolitical chaoses may turn the tide. For the March meeting, it will be a game between Saudi Arabia and Russia. If Saudi Arabia values US relations, it can not be close to Russia anymore. But it can not increase production too much to bankrupt shale. Russia has to push for more production such that the oil and gas prices should not bring new players to the already crowded game. Low prices are not desired. The options are limited and darker for everyone.

On the other side, the usual Sunday bombing of some ships in the Middle East and rocketing Saudi cities keep increasing. Geopolitical instability is the major reason for a price rise. There are limits to such tensions.

The roles of MbS and Putin are very different than the Trump era. This will certainly reshape with every step the US takes. Once, the best option for OPEC was to let everyone produce as much as possible to destroy shale. This was Ali al-Naimi's original plan which resulted in his sacking. The other option was targeting stock levels and price levels. Basically, there are not too many options.

Now OPEC is slowly guiding oil to its final endgame. There will be more drama, more exchange of words, more rockets, drones, explosions. There will be more volatility—the drama peaks toward the final curtain. The oil market is harder to control than before. Energy transition will make it more of a beast.


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