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Opec, like a dying star, is about to go supernova

Membership at record high, but share of global output at record low

THE Organization of Petroleum Exporting Countries (Opec) is dying. US President Donald Trump will probably rejoice. But he may not like what takes its place any better.

For a while, in its youth, the group burned so very bright, helping members wrest control over their oil industries and stand up to foreign producers - and their governments. But now, like every star, it is about to implode.

When a star runs out of hydrogen fuel, its core contracts and heats up, while the outer layers expand. It will then go one of two ways - either collapsing into insignificance to become a black dwarf, or exploding as a supernova.

Opec is turning into the latter. Though its ranks have swelled in each of the last three years, its new members have done little to bolster its production potential.  But just like that ball of gas in space, no external agency is required to bring about the end of Opec. Mr Trump's tweets, and threats of antitrust legislation, are sideshows and serve to endow the group with a lustre that masks its waning light.

The world has changed. Opec is no longer relevant in the way it once was. Though the group has never had more members in its 58 years of existence, the volume of crude it produces represents just a third of all the oil extracted in the world - the smallest share it has commanded in almost three decades. Not exactly the "monopoly" Mr Trump rails about.

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The group's ability to influence oil prices by either boosting or cutting output has also waned. Spare capacity available to lift production at short notice has become increasingly concentrated in the hands of a dwindling band of Persian Gulf Arab countries.

The inclusion of Russia in the group's latest supply management push reflects its waning power. Alone, it was both unwilling and unable to agree to remove sufficient volumes of oil from the market in 2016 to balance supply and demand. But Russia made all the difference.

Now that Opec needs to boost output, its lack of power becomes even more obvious.

Falling out

Only a small group of countries - led by Saudi Arabia - have the ability to lift production. For Venezuela and Angola, steep drops in output are involuntary and cannot be reversed. Libya and Nigeria were exempted from the deal and are already producing as much as they can. Iran's exports are falling faster than most analysts anticipated, and Trump wants to drive them to zero by early November.

This is a recipe for oil prices to continue to rise.  Internally, the political and economic differences between Opec's founding members now outweigh the common ground that brought them together in 1960. Now, far from rallying around a fellow member facing an external threat, two Opec countries - perhaps Saudi Arabia and the United Arab Emirates - are seeking to damage the group and carry out "anti-Iranian policies" at the behest of the US, according to the nation's oil minister, Bijan Namdar Zanganeh. He may be right, but there is little he can do to stop it.

Iran's oil exports are down by more than a third since April, and are set to fall further this month and next, as buyers flee. Saudi Arabia, meanwhile, has boosted its own production by 420,000 barrels a day over the same period and could test the record levels it reached in 2016 before the end of the year.

Sure, this is not the first time that Opec members have found themselves on different sides. The group weathered attacks by a founding member on two neighbors in about a decade, when Iraq attacked Iran in 1980, and then Kuwait in 1990. But the current disagreement seems more damaging to the heart of Opec, perhaps because the Saudi-Iranian tensions feel more fundamental than the aggression of Saddam Hussein.

Sunday's meeting of the Joint Ministerial Monitoring Committee, set up to oversee the 2016 Opec/non-Opec deal on production, doesn't have the authority to alter the group's policy. But it is becoming the instrument of the new Saudi-Russian axis.

The fall in Iranian supply as a result of Mr Trump's sanctions means that overall production by the Opec+ group is once again falling below the level agreed in 2016. Having decided in June that they should strive to bring overall compliance back to 100 per cent, Saudi Arabia and Russia will argue that those who can lift production should do so.

And who can do this most quickly? Saudi Arabia and Russia.

The death of a star takes billions of years. Opec's will happen a little quicker. But Mr Trump may not like a subsequent Saudi-Russian alliance any better. BLOOMBERG

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