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OPEC has come through some turbulent times in the last few years as oil prices fell to decade lows. It has implemented production cuts, has rallied Russia to climb onboard the production cut train, has weathered the rise of US shale to never-before-seen highs, has extended those production cuts, has lifted production to quell a nervous market post-Iranian sanctions, and then has managed to pull a rabbit out of a hat by agreeing to yet another production cut—and OPEC is not finished yet.
As we approach the new year, the 15-member-strong OPEC is facing another set of challenges. Here are some of the challenges they will face in 2019:
Manuel Quevedo: OPEC’s leadership is crucial to its success. It operates under a rotating presidency, and for 2019, that honor is bestowed upon none other than Venezuela’s Manuel Quevedo.
Manuel Quevedo has zero oil industry experience, taking over Venezuela’s crisis-stricken PDVSA and oil minister of the nation (which is pretty much the same thing). Instead, Quevedo’s experience is with the military, serving as National Guard major general prior to his position as insta-oil czar in a country that is falling apart at the seams. Quevedo was appointed in late 2017 to right the wrong ship that is PDVSA—and was given extra powers—let’s call it a special dispensation—to “create, annul or modify” deals involving PDVSA its subsidiaries. His reign dispensed with nearly 70 PDVSA executives in a massive “anti-corruption” sweep that some have labeled a mere power grab, despite Maduro’s insistence to the contrary.
Quevedo has been, so far, unable to right the ship, with Venezuela’s oil production and oil revenues falling at unprecedented rates, even when oil prices rallied mid-year. Quevedo has instead instilled fear into PDVSA workers and has implemented some policies that some argue have brought PDVSA closer to—not further from—the brink of ruin.
A Maduro loyalist through and through, Quevedo will now take over not only PDVSA and Venezuela’s oil industry, but will assume the rotating presidency of the most influential oil industry body in the world. But his lack of experience is only part of the trouble. OPEC has been the target of Tweets by US President Donald Trump—add to that President Trump’s vehement opposition to Maduro—the subject of US sanctions—and OPEC may find itself even more of a target. The worst thing for OPEC would be for Venezuela’s tenuous relationship with Washington to mar OPEC’s already tenuous relationship with Washington.
Quevedo is also strongly backing El Petro—its alleged oil-backed cryptocurrency—and has supposedly been invited by OPEC to speak about the rise of El Petro sometime in 2019.
NOPEC: Another hurdle OPEC faces in 2019 is the proposed US legislation that would allow legal claims against OPEC for manipulating oil prices, called the No Oil Producing and Exporting Cartels Act (NOPEC) In mid-2018, OPEC advised its members to stop referring to oil prices specifically, instead urging them to use phrases such as “balanced market” and the like. OPEC’s preemptive strike speaks to the plausibility that this legislation could be passed, as President Donald Trump’s strained relationship with OPEC plays out on Twitter and in the legislative branch.
Qatar walked out of OPEC just one month ago, potentially distancing itself from this legislation that if passed, would open up a whole can of legal issues for the cartel as it would end anti-trust laws, revoking the sovereign immunity that until now has protected OPEC members from legal actions regarding price fixing.
Libya: Libya managed to secure an exemption from the OPEC production cuts that will go into effect on January 1, 2019, allegedly due to its unstable oil production that ebbs and flows as infighting continues to batter its oil industry like a plague. But this exemption, and its chronic outages of its largest oilfield, Sharara, poses a challenge to OPEC, who is struggling to balance production with demand. As Libya’s production increases and decreases, OPEC has difficulty responding immediately to offset the ebbs and flows, and no single country has been fingered—at least not to our knowledge—to increase or decrease production to offset Libya’s production. The unknowns with Libya create an unknown for all of OPEC.
Russia, et al: The non-OPEC signees of the deal to cut production expose OPEC to a greater risk. OPEC needs heavyweight Russia on board with the production cuts. Russia has agreed to cut production, along with several other lesser non-OPEC producers. But it has also said that it will be a gradual production cut, beginning in January but not reaching full cut volumes until March. Here, Russia holds some sway, exacerbated by its cozy relationship with Venezuela and major general Quevedo, who has been the recipient of substantial loans courtesy of Russia’s generosity. OPEC has recruited Russia out of necessity, and being in bed with Russia exposes OPEC to greater risks. Should Russia renege on the deal with OPEC, the production cut agreement would be largely toothless.
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Speculators: Oil prices still respond to OPEC chatter, leaked information, statements to the press, and monthly production figures that either show OPEC’s success in hitting professed production targets. But the latter half of 2018 saw the beginning of a partial immunity to such news, and as the oil market continues its recently acquired anxiety disorder, 2019 is unlikely to look much different. What OPEC could previously achieve with a mere promise to curb production (or increase production), will now be met with increasing apathy—show, don’t tell will be the new norm for the oil market as traders work against OPEC, albeit unconsciously.
US Shale: The United States shale industry has been a thorn in OPEC’s side since the cartel’s initial “pump oil until we crush them” policy rolled out prior to its first round of production cuts in 2017. The rise of US shale will continue to be so throughout 2019 as production increases continue unabated. Unlike OPEC members, US shale producers are only inhibited by price, and even that has proven to be a nondeterrent to increasing production. For every barrel that OPEC doesn’t produce, oil producers in the United States will happily export in its stead. The United States’ entry as top dog when it comes to oil production at 11.7 million bpd toward the end of 2018 has taken much wind out of OPEC’s sails, making it more difficult for OPEC to manipulate the market. This will continue throughout 2019.
OPEC will have an uphill battle in 2019, but its influence as a cartel should not be dismissed entirely. The oil market in 2019 will be largely affected by OPEC—just not single-handedly by OPEC as other major players rise to sway the market as well.
By Julianne Geiger for Oilprice.com