Saudi Arabian Crown Prince Mohammed bin Salman announced last week that his country was halting production cuts — and that was really not the headline. His more important announcement was that Saudi Arabia was planning to scale back its price target for crude oil, which means that OPEC, in consultation with Russia, would put an end to their joint strategy of cutting production to prop up prices. Most of the other members of OPEC responded by saying they’d talk it over.
But the tensions between Saudi Arabia and its fellow Gulf members — the United Arab Emirates, Kuwait and Qatar — show how unstable OPEC is as it prepares to work together on production policies. The coalition has been formed in an effort to hold together the supply of oil and its consumers against increasing price volatility.
The Qataris are particularly hawkish.
Qatar has held back on buying West Texas Intermediate crude, which trades in New York, on fears that doing so would prompt an automatic supply cut on the world oil market. In fact, the expectation was that it would be given the right to bump its production. But now that happened.
Instead, all of the Gulf OPEC members, except Bahrain, say they’re canceling the cuts. The Qataris appear to want to encourage their own production to keep prices low — and, because Qatar is the smallest member of OPEC, that means OPEC is left with an unlikely faction.
The Saudis, in the meantime, have already gone against their original goal. On Friday, they appeared to backtrack from Prince Mohammed’s claim that Saudi Arabia was going to stabilize prices at $55 a barrel. The price is around $58 a barrel now. In the meantime, the market has taken a sharp hit from both the Saudi announcement and the sharp drop in production from Iran.
Iran’s Foreign Minister Mohammad Javad Zarif released a statement to the news agency ANNA on Sunday saying that the decision to cancel the OPEC agreement between Saudi Arabia and Russia came with a “carefully worded” note that said Saudi Arabia would restrict crude production only to levels agreed to in November 2016 — which, because of the global decline in oil consumption, they hadn’t quite hit.
This week, OPEC members are meeting in Vienna to prepare for the formal, January 2018 meeting. The debate over whether and how much they’ll produce will be fierce. They say that the issue isn’t really about the revenue that they might lose, but rather about the cost of a supply reduction. On the other hand, any cuts they make at this point would be lost revenues and harm their pricing power.
Related: Saudi Crown Prince calls OPEC decline in output ‘contemptible’
Whatever comes next, OPEC members are clearly at risk of being cut off from their values. The historic alliance of the Saudis and the Saudis of Iran has already faced serious trouble in the past. And, if you thought the Qataris were left out on a limb now, you don’t know them. They’re going to have to defend a position that will have significant implications for their long-term supply and pricing plans for the next 20 years. It’s possible that OPEC will prove too divided to make a concerted decision.
But if that ends up being the case, as the consensus is that it will, this shouldn’t be another OPEC affair. It will be instead a hotly contested geopolitical dispute pitting strong but stubborn oil countries against each other.
As a result, the organization is set for a real upheavel that could have far-reaching impacts on the global oil market.