Testy times for Opec’s crude dominance

AT THE start of this year, the Organisation of the Petroleum Exporting Countries (Opec), following consultation with its 10 allies (Opec+), released a statement underscoring the groupings’ united efforts to steady the oil market.

Indeed, over the past decade, the oil cartel has been adept at propping up the commodity amid major adversities – the oil slump in 2014/15 and the historic pandemic-spurred oil crash in 2020.

Most recently since the end of 2022, the Opec+ alliance implemented output cuts to support prices. This followed Russia’s attack on Ukraine, which fired up inflationary pressures and hurt the global economy and in turn, dented energy demand.

Opec’s recent move to trumpet its united front also comes in the wake of renewed discussions on whether the powerful 12-member grouping’s dominance in the global oil market could be fading, even as there appears to be discord among members.

This year could further test the alliance’s cohesiveness as well as the bloc’s significant influence on the commodity.

Based on Reuters’ calculations, Opec is facing weakening demand for its crude in the first half of 2024 just as its global market share declines to the lowest since the Covid-19 pandemic owing to output cuts.

Friction among members came to light when Angola said last December that it would exit the bloc after 16 years so it can pump as much as it wants.

Angola’s departure will leave no meaningful impact on the global oil market’s direction. Opec+ heavyweights Saudi Arabia and Russia, as well as major Middle Eastern producers, still rule the roost. But it does underscore the varied domestic oil policies among their ranks which challenge the cartel’s cutback agenda. It also indicates tensions within the group.

The timing could sting. The global market share of Opec+ has been sliding, owing in part to its own supply cuts to bolster prices as well as rising production from US and non-Opec+ producers. According to the International Energy Agency, the Opec+ share of the oil market in 2023 has fallen to 51 per cent – the lowest since the bloc’s creation in late 2016.

Despite decreased production for months and new cuts announced by Opec+ last November, crude prices haven’t budged much until recently given the escalating geopolitical tumult in the Red Sea.

Part of the reason for the price inertia may be owing to abundant global supply or weakening demand. This merely reinforces the perception that whatever Opec and allies do, there is going to be enough oil – a blow to the bloc.

The energy transition away from fossil fuels that could see global demand for oil shrink is set to be another big drag. The green transition could also potentially stir disunity in the pact as members adopt varying strategies to decarbonise their economies. But just as the weaning off of fossil fuels is unlikely to happen anytime soon on the back of robust energy demand globally, neither will Opec+ relevance in the global oil market disappear overnight.

While it has fallen, Opec’s global oil market share stands at 27 per cent – still a respectable grip. The bloc also has a healthy reserve of spare production capacity as a result of its production cuts. These could be unlocked should the need arise.

To be sure, Opec had better brace for its clout in the global oil market to be challenged further. But hit back it most likely will.