OPEC energy and oil ministers attending the 8th OPEC International Seminar in Vienna earlier this month were, on the face of things, surprisingly upbeat. The organization’s Secretary-General, Haitham al-Ghais, expressed confidence that new members would be joining in the foreseeable future; he declined to name any of the candidates, although it is known that Ecuador, which quit in 2020, is considering rejoining. He also claimed that OPEC members would account for 40% of the world’s total oil production by 2040–45.

Meanwhile, the cartel collectively stuck to its guns on its above-consensus forecast that demand would increase this year with what is an abnormally high—by historical standards—2.35 million barrels per day (bpd), and it hinted that its forecast for demand growth in 2024 would be around double the International Energy Agency’s (IEA) forecast of 860,000 bpd. Indeed, the only negative note among OPEC member country delegates was concern over what some see as underinvestment in new output.

Yet all is not well, as the following two, in my view related, points should make clear.

Oil demand will not support prices

First, between October and June, the thirteen-member cartel, in conjunction with the 11 non-members that are also in the OPEC+ group, agreed to cut output in three instances, for a total of over 4 million bpd. At the start of last week, Saudi Arabia announced that it would extend through August the voluntary cut of one million bpd it announced in early June; this was quickly followed by Russia’s announcement that it would trim its output too, by 500,000 bpd next month. In principle, at least, this means that total OPEC+ output next month will stand over five million bpd below its output this time last year, i.e. around five percent of total world consumption.

However, the headline consequence of these cuts is that Brent crude sat at $78.47 per barrel when markets closed for the weekend on 7 July, as against $91.80 per barrel immediately before OPEC+ announced its first cut on 5 October (and $107 per barrel a year ago!). As things stand, both Russia and Saudi Arabia could decide not to persist with these latest cuts beyond August. But further extensions currently look, to me, to be much more likely. Besides, the remaining four million bpd reduction is due to remain in place until 2024 in any case.

To an extent at least, one can continue to dismiss this as a consequence of what I have been describing since last October as “OPEC vs central banks,” as the latter continue to struggle to bring inflation under control. Inflation is coupled with a decidedly below-expectations economic recovery in China, to date at least, following the relaxation of Covid-related restrictions at the end of last year. However, writing in the Financial Times’s “Energy Source” newsletter on 4 July, David Sheppard flags a second, and important, point as follows:

The group’s recent struggle may reveal a difficult underlying truth. Few investors buy the cartel’s message that we’re simply no longer investing enough in oil production, and therefore the price needs to rise to avoid shortages. The market believes, to put it simply, that there will be enough oil around for the foreseeable future.

Sheppard acknowledges that OPEC has been sharply critical of the (clearly related) belief of the International Energy Agency (IEA) that “growth in world oil demand is set to slow markedly during the 2022-28 forecast period as the energy transition advances” and its view that we shall likely reach “peak oil” before the end of this decade. He goes on to say that, in stark contrast to the market anxieties of “the $100 a barrel era of … 2005-2014,” investors simply do not see a serious risk of there being a structural (as opposed to shock-driven, short-term) shortfall in supply. This, he argues, “inevitably filters through to prices today.”

Noting, but largely marginalizing, short-term factors currently in play such as inflation-related concerns, Sheppard concludes that “underpinning oil’s rather flat 2023 [there is an] almost complete lack of fear about the long term. That’s a big shift that should worry OPEC+ even more.”

Can the cartel keep its unity if prices drop?

Second, if the IEA and, it seems, a clear majority of investors are correct, it is well worth asking whether OPEC can survive as we approach, seemingly rapidly now, an era where demand for oil is set to fall dramatically and irrevocably. We may indeed already be very close to the point where at least one major producer, deeply concerned about stranded assets, could be cut and run and, in so doing, fire the starting pistol for a free-for-all.

The producer in question is, of course, the United Arab Emirates. In a podcast with Arab Digest, William Law debated with the Baker Institute’s Jim Krane on whether the Emiratis should “go or stay” and, if the latter, whether they would quit imminently or bide their time for now.

There is nothing new about this. In mid-2021 when a major dispute blew up between the Saudis and the UAE over the latter’s baseline (from which its OPEC quota is calculated) CNBC’s Sam Meredith was one of many commentators (among whom I was not numbered!) who wondered whether the dispute could trigger the immediate demise of OPEC.

As I wrote for Arab Digest at the time, that the crisis was defused owed more to papering over the cracks than it did to reaching a sustainable accord. Even last month’s upward adjustment in the UAE’s baseline is no more than a temporary reprieve, in my view, as was underlined by the Emiratis’ refusal last week to join in with ‘voluntary’ cuts.

Of course, OPEC has been written off on more than one occasion in the past; and it has survived more than one departure. However, for a minor producer such as Ecuador (500,000 bpd) to quit is one thing—especially at a time when global demand for oil was rising sharply. For the UAE to do so at the start of an era when demand is set to fall in perpetuity would be quite another.

[Arab Digest first published this piece.]

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.