A 'crude' game is afoot - Newspaper - DAWN.COM - DAWN.com

A ‘crude’ game is afoot - Newspaper - DAWN.COM

An interesting tussle is on within the expanded Organisation of Petroleum Exporting Countries, the OPEC+. To some, propping up the market prices is of utmost importance, while to others, increasing their market share is of optimal interest. And the two objectives are diametrically opposed to each other.

While Saudi Arabia, in conjunction with Russia, is striving hard to put a floor beneath the crude markets by cutting their respective output, countries like Iran and Venezuela are targeting to increase their production and gain back some lost market share at a point in time when output is reportedly recovering in both Kazakhstan and Nigeria.

Crude oil markets are torn between these two conflicting and contradictory plays.

The Wall Street Journal reported in early July that courtesy of the $30 per barrel discount offered by Tehran to its regular customers, Iran’s exports have surged to the highest level in nearly five years. Iranian exports touched the 1.6 million barrels per day (bpd) mark in May and June.

That’s more than twice the amount of oil sold during the same period last year, and it’s the highest volume of oil Iran has exported since the US reimposed strict sanctions on the country in 2018. It is significantly up from 250,000 barrels in 2019 and 2020.

The oil market is torn between two conflicting plays of propping up prices or increasing market share

This is a cause of concern to OPEC heavyweight Saudi Arabia. This increasing Iranian output challenges OPEC’s control over the oil markets.

Iranian output trajectory, despite Western sanctions, is an interesting case study. It has gradually been growing over the last few years. Iran’s monthly production, as reported by OPEC’s secondary sources, averaged 2.679 million bpd in May 2023.

This was an increase from the 2.544 million bpd produced by Iran in May 2022, and the average 2.455 million bpd the country produced in May 2021. It’s an even more significant increase from May 2020, when Iran’s production was less than 2 million bpd and was registered at 1.978 million bpd.

Iran has used various means to export its oil and maintain a respectable market share under sanctions. Tehran blended Iranian refined oil into Iraqi oil for a short stint to evade sanctions.

It engaged in ship-to-ship transfers and turned off AIS (Automatic Identification System) transponders to hide oil exports from tanker sleuths. And to some extent, ever since getting under Western sanctions, Russia too has followed the same path to continue exporting its oil to customers.

And, it is not Iran alone that has been increasing crude exports. Oil exports from another sanctioned country, Venezuela, rose eight per cent in June from the previous month to above 715,000 bpd.

As per the data available, Venezuela’s oil exports have averaged 670,000 bpd in the first half of the year, almost 15pc above the 585,000 bpd of the same period of 2022.

In the meantime, Nigeria, OPEC’s largest producer in Africa, is also targeting to increase its oil production to up to 1.7 million bpd by November 2023, from the current 1.5 million bpd, Gabriel Tanimu Aduda, Permanent Secretary at Nigeria’s Ministry of Petroleum Resources, told Energy Intelligence on the sidelines of the OPEC+ seminar in Vienna earlier this month.

All this is worrying to the major oil producers, Saudi Arabia and Russia, who appear determined to take back control of the oil markets. The output rise from other OPEC members is detrimental to their efforts.

OPEC has seen similar situations in the past too.

Yet, despite dissensions within the group, on all such occasions in the past, it has been able to sail through the odds and maintain a semblance of unity within the group. This time could be no different too, one needs to concede here.

The meeting between the Iranian Oil Minister Javad Owji and his Saudi Arabia counterpart Prince Abdulaziz bin Salman on the sidelines of the OPEC conference in Vienna a couple of weeks back needs to be seen from this perspective.

Oil markets would depend on how successful OPEC+ is in putting its house in order and overcoming the centrifugal forces within its ranks.

Cash-starved, oil-importing countries, Pakistan included, need to keep a close eye on the emerging crude market situation. If OPEC remains divided on the output issue, it may help Pakistan reduce its oil import bill significantly and rein in the spiralling inflation.

Otherwise, the global demand outlook would continue to rule the crude market dynamics and Pakistan would be at the mercy of it.

Published in Dawn, The Business and Finance Weekly, July 17th, 2023