There's one big question mark hanging over OPEC heading into 2018

The Saudi oil minister, Khalid al-Falih, has worked hard over the past year to get the majority of the world’s biggest producers to combat a global supply glut by honouring agreed-upon output cuts.
Now, some are beginning to wonder what will happen with compliance when al-Falih finishes his one-year term as the president of the Organisation of the Petroleum Exporting Countries (OPEC).

“One question mark hanging over OPEC for 2018 will be what will happen when al-Falih hands off the rotating presidency and will not be able to deploy the power of that office to crack the whip on errant producers and to steer the overall output agenda,” Helima Croft, global head of commodity strategy at RBC Capital Markets, said in a note.

“Though always maintaining a placid public demeanour, the Saudi Oil Minister has worked tirelessly behind the scenes to force the producers to honour their output commitments,” she explained. “He has also actively sought the views of some of the most important oil traders in order to better calibrate both production and export policy.”

OPEC’s compliance to the production cut agreement started out strong, but has slipped over the summer. Several countries have fallen short of commitment expectations including Iraq, Algeria, and the United Arab Emirates, according to Croft.

Al-Falih is not the only person to wield a huge influence over OPEC action. Mohammed Barkindo, the cartel’s secretary general since August 2016, has actively worked to orchestrate cooperation within OPEC and helped put together a coalition in favour of the November 2016 output agreement.

The cartel and several other major producers (but not the US) first agreed to cut production back in November 2016, with the Saudis agreeing to bear the brunt of the cut. In May, they extended production cuts through March 2018. The decision to reduce production reflected producers’ desires to end the global supply glut, which kept oil prices depressed for over two years and increased domestic financial stresses.

Against this backdrop, Saudi Crown Prince Mohammed bin Salman (“MBS”) has been pushing forward with his Vision 2030 plan, which aims to curtail the kingdom’s “addiction” to oil via various measures including the public listing of a part of the kingdom’s crown jewel, Saudi Aramco. This domestic agenda may be part of the reason for al-Falih’s “sense of urgency,” argued Croft.

“We contend that it is hard to overstate how much personal capital MBS has invested in the success of Vision 2030 and his political fortunes could ultimately hinge on the outcome of his ambitious economic agenda,” she said. “The oil price imperative may recede if MBS is able to cement his authority and rack up some clear Vision 2030 policy wins, especially as generating non-oil income is the plan’s ultimate goal.

“However, with 2018 set to be a crucial transition year for MBS and Saudi Arabia, we see no change in oil policy for the year barring a surprise leadership shake-up,” Croft concluded. “Hence, Khalid al-Falih may have to employ his emeritus status to keep everyone in OPEC honest in 2018.”

On Friday, OPEC’s Joint Ministerial Monitoring Committee, the producer watchdog, is meeting in Vienna, where attendees are expected to draft their game plan for the next year. This will be one of the group’s last meetings led by al-Falih.

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