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Bulking up to create a Super-OPEC

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It may only be 16 months old but the success of a dozen OPEC nations, joined by 12 non-OPEC producing countries, is setting the stage for a plan to formalize the “Vienna Group” as a new Super-OPEC organization. Not that the reasons underlying the creation of this new organization are positive. Necessity, created out of the folly of initially flooding the world market with surplus oil, lies at the center of the group’s need to stay together, longer, to lower crude inventory levels and increase prices: all this against the backdrop of ever-rising record U.S. shale production.

As numbers confirm, the OPEC-driven oil glut of late 2014 is now finally on a downward trajectory with global oil stockpiles sitting at 1.8 million barrels a day less than when agreed productions cuts began. The effect of two years of underinvestment in new oil prospects are beginning to be felt, and for OPEC and its new friends, the timing surrounding the institutionalization of this Super-OPEC, couldn’t be better. The meeting of the minds on reining in oil output isn’t just a point of convergence for two former rivals, Russia and Saudi Arabia, it is more likely to allow the oil kingpins to achieve their $70 a barrel quest, sooner and in spite of jaw-dropping U.S. oil output. But it doesn’t end there.

If statements by the Saudi energy minister are to be taken at face value, the intent by the gang of 24 producers, representing 80% of the world’s proven oil reserves and 55%of its current supplies, is to cut further, even if the effect is to overshoot production quotas. This would lead to an obvious shortage by year’s end, even if, as expected, demand weakens. Galvanized by the existential threat posed by shale production, indications are that the common bonds of former rivals are stronger than ever with some countries within the new group even advocating a permanent and long-lasting cartel. In essence, a new OPEC is emerging with potentially the same influence on prices as it once had.

Let’s hope shale production sees no declines because the new Super-OPEC appears poised to be well positioned when the fundamentals of supply and demand get tighter.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded tomorrowsgaspricetoday.com to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.