By Arab News
By Wael Mahdi*
The meeting of the Joint Ministerial Monitoring Committee — in charge of monitoring the current global output cuts agreement between OPEC and their non-OPEC allies — on Sept. 23 isn’t going to be an easy meeting.
The JMMC is scheduled to discuss a new mechanism to assign individual quotas for the 24 countries who are part of the agreement which now enters its 21st month.
The alliance of the 24 countries agreed in June to boost production to bring down the total volume of cuts to 1.8 million barrels per day (bpd). The alliance, known as OPEC+, was cutting production by more than 1.8 million bpd as many countries were cutting involuntarily due to natural or forced declines in output.
The cause behind this is noble, which is to ensure that the market will stay balanced. That noble cause, however, is questioned by Iran, which objects to any attempt from the committee to assume a larger role.
Iranian Oil Minister Bijan Zanganeh threatened to veto any decision by the JMMC to redistribute quotas as they suspect that some members are trying to take their share in the market after the US ban on Iranian oil sales.
Iran is pressing that the JMMC should take that decision at the next Ministerial meeting of OPEC in December as the Ministerial conference is the only legal body that can take such a decision.
Iran has a valid point but the JMMC, made up of Saudi Arabia, Russia, Kuwait, Oman, United Arab Emirates, Venezuela and Algeria, may agree on the mechanism and quotas and recommend that for the meeting in December.
Another possible scenario is that the JMMC takes that decision and only includes the members of the committee in executing that decision as in reality only the JMMC countries plus Iraq have that capacity.
However, Iran’s demand to postpone the decision isn’t practical. The oil market is tightening fast and oil demand will soon hit 100 million bpd.
As demand grows, only few countries at the moment can meet it. The supply picture isn’t rosy due to a fall in production in Latin America; a ban on Iranian shipments by the US; a fragile situation in countries such as Libya; and, finally, an infrastructure bottleneck in the Permian, America’s largest basin for shale oil.
In addition, the amount of spare capacity OPEC has isn’t considerable, and the International Energy Agency estimates that at 2.7 million bpd, 60 percent of which is in Saudi Arabia. That is a larger buffer than some other analysts believe, although that does not mean that all of that is available at short notice.
Russia is already taking steps. According to recent media reports, it is pumping crude this month at record levels. It may release up to 11.3 million bpd to the market.
Politically, the US is publicly exerting pressure on OPEC to lower prices below $80, although there seems to be some understanding that oil prices at $80 is reasonable considering the supply shortages. Some analysts and hedge funds believe that oil can hit $90 or $100 in fourth quarter.
Whether Iran likes it or not, the US will enforce the ban on Iran’s oil and its allies will cut purchases. And someone will need to step in to cover for the shortage in the market. Doing this under a mechanism that ensures equality among the players is better than having an open race to fill the gap.
It is highly important here to understand that not everyone has the extra barrels needed so only those who can walk the walk are talking the talk at Algeria.
If the JMMC succeeds in Algeria in assigning quotas and to agree on a mechanism, that would signal a new way to do business for OPEC+. It is understandable to see many countries fearing that the JMMC will gain more power and authority over the Ministerial conference. However, the JMMC is only becoming an executive arm of the Ministerial conference.
The JMMC will assure the market that OPEC+ is practical. The JMMC meets bi-monthly so it can work faster under the general terms of any agreement under set forth by the conference.
What Iran is really concerned about is that some countries inside OPEC are gaining more power and acting without waiting for months of talks by member countries.
OPEC+ can’t be blamed for the shortfalls of OPEC itself. And Iran can’t accept seeing Russia increasing its share in the market, and denying that right to other players in OPEC.
What’s important to keep OPEC alive in the coming decades is to find middle ground, and that’s what the JMMC is trying to do.
So whatever decision that comes out of Algeria, it will be important, if not historic, but only if the JMMC was able to create order within the organization and to conduct business in a new way that makes OPEC relative to the market while respecting and honoring all agreements made by the Ministerial conference. It’s a one-day meeting but it may change the world for OPEC.
* Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi