OPEC faces challenges as economic activity relies on mass vaccinations | Analyst Picks| RiskMap 2021
OPEC faces challenges as economic activity relies on mass vaccinationsPatrick Osgood | Senior Analyst
The global economic recovery in 2021 will challenge the relevance and cohesion of the Organization of Petroleum Exporting Countries (OPEC), more than the initial wave of the pandemic itself.
A 12 April 2020 deal between OPEC and several other oil producing states (together, OPEC+) to take almost 10 million barrels per day (bpd) off global markets put a floor under a COVID-induced collapse in oil prices. Saudi Arabia, having hammered global oil prices further by abruptly flooding the market in March, resumed its position as the global leader of oil markets by securing the April deal.
Low oil prices devastated the US shale sector, halting the flow of easy money from Wall Street in a way that will reduce shale’s threat to OPEC+ producers for years to come. Increasing divestment from private sector oil companies will leave OPEC’s state producers best placed to maintain and even grow their market share in the coming years.
Yet OPEC+ tensions flared before 2020 was even out, with major disagreements over whether to extend production cuts into early 2021. The greatest enemy to OPEC’s relevance is no longer unconventional oil as it was in the 2014 price crash, but OPEC itself.
No OPEC member – including Saudi Arabia – can balance its budget at current oil price levels that increasingly look like the new normal. The idea of pursuing market management through production cuts is falling out of favour. Only China and India look to be future growth markets for oil. Competition between major producers at the heart of OPEC+ will increase pressure on production targets.
Most woundingly for Riyadh, the leader of the cuts initiative, the UAE has begun questioning the value of its OPEC membership. The emirates have firm production growth plans and anxieties about stranded assets and lost market share that leave no room for keeping spare production capacity.
Other OPEC states, their budgets crumbling under unsustainable deficits, want to up production more out of a sense of desperation than destiny. Iraq in particular is at risk of fiscal collapse in mid-2021, increasing the chance of it dropping out of the OPEC+ accord. Russia is vital to the effectiveness of OPEC+, but has been cheating on its targets and is too big a player for Riyadh to chide. Riyadh ultimately only has the threat of flooding the market to keep everyone in line – a measure that would explode OPEC’s fragile unity.