[Salon] OPEC: ‘No Clear Option’ - ArabDigest.org Guest Post

OPEC: ‘No Clear Option’ Summary: confronted by economic and geopolitical uncertainty, OPEC+ ministers will still have no good options to turn to when they next meet on 1 December, pointing to a probable further postponement in unwinding voluntary cuts in output. We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast, Of peak oil, grey rhinos and $70 a barrel here. “When there’s no clear option, it’s better to do nothing.” Erwin Rommel (1891-1944) When OPEC+ members assemble in Vienna on 1 December for their next bi-annual ministerial meeting, they would do well to keep in mind the advice on options offered by the man known popularly as ‘the Desert Fox’. After all, if anything the choices confronting them have become even less palatable since they first delayed the ratcheting back of their voluntary production cuts of 2.2 million barrels per day (bpd) on 5 September and then agreed to hold off again on 3 November. Consider first the International Energy Agency’s (IEA) November Oil Market Report, published last week. The key points in its forecast are as follows: Global demand is expected to grow from an average of 102.8mbpd this year (up slightly on the October forecast despite Chinese demand contracting in September for the sixth month in succession) to 103.8mbpd in 2025; The United States will continue to lead non-OPEC+ supply growth of 1.5mbpd in both 2024 and 2025; and, Even if the voluntary cuts remain in place, supply in 2025 is therefore set to exceed demand by around 1mbpd. As usual, the OPEC secretariat’s latest Monthly Oil Market Report is not as bearish as the IEA’s despite some further moderation. However, its forecast will still be seen by investors against the backdrop of it having consistently overestimated demand (from China especially) since the start of the year. Second, there are two big and related economic ‘known unknowns’ on which little, if any, additional light is likely to be shed until January at the earliest, as follows. Although all the signs emanating from Washington since the 11 November newsletter was published are consistent with my view that Donald Trump’s pre-election promises should be taken seriously, it is still far from clear how far and how fast he will move on tariffs. Even before the US election, the IMF was warning that, if higher tariffs hit a “sizeable swath” of world trade by mid-2025, at best it would likely wipe 0.8 per cent from economic output next year and 1.3 per cent in 2026; and that in what was a ‘worst case’ scenario, i.e. widespread tit-for-tat retaliation, they could shave around seven percent off global GDP, equivalent to “losing the French and German economies”. In addition to what I believe to be its inevitable retaliation, China may finally be spurred into the major consumer stimulus, for which some economists have been pressing for months to drag the economy clear of deflation; this despite spurning another opportunity to unveil a ‘bazooka’ earlier this month. The optimistic view is that Beijing was waiting to see exactly what the Trump Administration does on trade. However, more cautious commentators such as the Peterson Institute’s Tianlei Huang warn that "doing so would require Beijing to overcome both its longtime fiscal conservatism and its bias against direct spending on households, which will not be easy." OPEC Secretary General Haitham Al Ghais speaking at the African Energy Week that took place in Cape Town, South Africa, from 4-8 November 2024 [photo credit: @OPECSecretariat] Third — and, some might argue, ‘on the other hand’ — there is geopolitics. How the conflict in the Middle East will evolve in the coming weeks also remains far from certain (even before the self-proclaimed ‘first buddy’ Elon Musk allegedly met ‘secretly’ with Iran’s ambassador to the UN last week, a meeting which Tehran “categorically denies” took place). However, Mr Trump’s hawkish nominations in the past few days — Macro Rubio, Mike Waltz, Mike Huckabee — are arguably consistent with the opinion I set out on 11 November that he would seriously consider directly involving US forces in the strikes against Iran’s nuclear facilities on which Benjamin Netanyahu seems intent. Although investors have been remarkably relaxed, to date, about conflict-related supply side risk, this scenario could see Brent “heading towards, or even through, US$100pb”, as I argued in the 28 October Newsletter. However, any spike would likely be short-lived if the US were directly engaged; and a successful campaign could be worth US$3-5pb off the current price of Brent (i.e. US$72.50pb) as perceived political risk across the region eased. Also on geopolitics, the emerging consensus appears to be that any agreement over Russia/Ukraine is unlikely to be struck quickly, meaning no major change in the volume of Russian oil finding its way into the international market in the foreseeable future. As Russia expert John Lough wrote in a 12 November note for Chatham House: …a charge that he was a weak negotiator would offend [Mr Trump’s] vanity and damage his image in the view of Chinese policymakers – who will be watching closely. It is fair to assume that Trump will want to avoid this perception since he has worked hard to create the impression that China, Iran and others should continue to fear him in his second term. Pulling all this together, I am reminded of the 5 September note by Bloomberg’s commodities expert Javier Blas from which I quoted in the 27 September Newsletter as follows: …looking at the 2025 balance of supply and demand, OPEC+ is simply kicking the can down a very uphill road. In two months, the group will have to take another fateful decision. If it wants higher oil prices in 2025, it will have to do far more than delaying the almost 2 million barrels a day of extra production that it penciled in by the end of next year. It will need to cut output outright. Without curbing production, further price drops loom. OPEC+ chose to duck that “fateful decision” earlier this month. Doing so again on 1 December would be no easier as the eight voluntary cutters in particular chaff at idle capacity. They may decide enough is enough. However, barring a major and seemingly sustainable supply side shock between now and then, a ‘decision’ again to do nothing still looks to be their least bad option. Members can leave comments about this newsletter on the Arab Digest website