Qatar to withdraw from OPEC in 2019: Oil markets to be dominated by US, Russia; fractionalised cartel suits India better

The oil markets are abuzz with Qatar's oil minister Saas-Al-Kaabi announcing a withdrawal from OPEC after 57 years of membership of the oil cartel. What does it mean for an average oil trader and more importantly, an average fuel buyer at the petrol pump? Let's take a sum of the parts look at the scenario.

Qatar, a tiny nation in the Gulf, has 2.1 percent of the global oil reserves. It produces 6,00,000 to 8,00,000 barrels of oil per day, making it a marginal player in the oil export sweepstakes.

However, the scenario changes when viewed from the LNG perspective. When oil and gas output is taken in toto, Qatar's output figures surge to 4.8 million barrels per day (bpd). This means Qatar exports over 4 million barrels of oil equivalent in LNG (liquefied natural gas). This figure makes Qatar a “swing producer” in the international LNG markets, and its output is slated to zoom 50 percent in the next 5 years.

Swing producers are nations whose output tweaks create ripples in the market prices, and in the LNG market Qatar is a big boy. The tiny nation is big on per capita income, which is the highest in the world (approximately Rs 97 lakhs per annum). Qatar employs 7 lakh Indians on its soil who repatriate a large number of oil dollars every month. India also sources a major chunk of its LNG from RasGas of Qatar via Petronet LNG, which is a listed entity on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

OPEC—an oil exporter's cartel that is a self-regulatory organisation, determines quotas for each country to export oil and gas per annum. In many ways, it is a strange organisation, probably doomed to unravel, thanks to its functional style. Member nations are allotted quotas based on claimed reserves as against proven reserves. Most Middle East nations do not permit third-party seismic audits of their wells. So OPEC members regularly exaggerate their claimed reserves to export more and muscle up their dollar reserves.

 Qatar to withdraw from OPEC in 2019: Oil markets to be dominated by US, Russia; fractionalised cartel suits India better

OPEC logo. AFP

Secondly, quotas set by OPEC are flouted more often than respected. Veteran oil traders know that oil ministers of member nations flout export quotas as soon as they can access their cell phones after the OPEC meeting concludes. Oil, as I have written earlier on Firstpost is an extremely complicated commodity, involving business, politics, speculation, terrorism etc.

Third, OPEC is split right down in the middle. The traditional OPEC chief is Saudi Arabia, a Sunni-Wahabi nation. Unhappy with its domination are Shia countries led by Iran. Discontent has only risen over the years. What has kept OPEC cemented together over the years, inspite of religious, political and geo-political rifts is—money. It was felt that a cartel could negotiate prices better than individual nations.

In many ways OPEC started unraveling after the ISIS captured oil wells in Iraq and started selling this oil at steep discounts in the black markets. Many unconfirmed reports in the global media point a finger of suspicion at Turkish strongman Erdogan’s son who facilitated these oil deals. Herein lie the seeds of strife between Turkey and Saudi Arabia. If you think about it, the Jamal Khashoggi murder has widened the rift further.

Fourth, Saudi Arabia needs big money, and fast. Prince Mohammed Bin Salman (MBS) has a vision (Vision 2030) that involves building new cities in the northern Saudi desert, reportedly at a cost of $350 to $400 billion. To raise this money, Aramco’s IPO was announced and oil prices were “boosted” with the help of ever-willing Vladimir Putin.

The Saudi-Russia accord of 2017 was another nail in the OPEC coffin. Within weeks of this accord, Russian President Vladimir Putin signed an accord with Iran, that precipitated the discontent in OPEC. Add a very distressed and unhappy Venezuela that is gearing for polls in 2019, Indonesia, and the cauldron called OPEC is being churned and stirred vigorously. That OPEC has been undermined time and again is an established fact. This time the cracks are noticeably bigger and may reach a tipping point.

The fallout—since the Saudis blocked Qatar in June 2017 with the aid of Kuwait, Egypt and the UAE, and the stand-off has been nothing short of weird. Saudi airspace is blocked for aircraft to pass over into Qatar. Access is blocked by land (Saudis are constructing an artificial canal to isolate Qatar totally) and supplies of essentials are stopped to Qatar. Turkey airlifts food, medicines and emergency supplies and sends to Qatar on a day-to-day basis. The UAE meanwhile continues to buy LNG from Qatar as it did before as if the political rift did not exist. This strange situation could not continue for long and something had to give.

Veteran Middle East political pundits are frankly surprised that Qatar took 18 months to announce its withdrawal from OPEC, after being assaulted by OPEC chief, Saudi Arabia.

In the real world, oil markets will now be dominated by US President Donald Trump (US is now the big daddy oil producer in the world, and exports for the first time after the Yom Kippur war of 1973) and Putin, the largest non-OPEC exporter of oil. Together they will carve up the OPEC, over the years of course.

Countries will take sides and align themselves with one of the two majors. So we will have two competitors in the market, who will be at times forced to cut prices to grab market share from the other. Under a unified OPEC, it was a state of a near-monopoly and output tweaks boosted prices whenever the members wanted it.

Indian energy scenario

India has been friends with both USA and Russia. So sourcing oil at friendly commercial terms from any of them should not be a problem. Where LNG is concerned (I consider gas to be a major factor in the Indian hydrocarbon footprint and economic progress), a fractionalised OPEC suits us better. We can wrangle out better terms from Iran, Qatar and Russia, all of whom have high calorific content yielding superior quality gas in their vast reserves.

Qatar is not only a major-domo LNG supplier via Petronet LNG, but is also a major foreign portfolio investor (FPI) in Indian equities markets. It has committed over Rs 40,000 crore to the Bharat Mala road building projects and is open to further investments in India. What is good for Qatar, is good for India. Our 7 lakh citizens will continue to send home gas dollars.

Why did the crude prices rise in the last few sessions then? Because the Saudis and Russians are planning an output cut. It has nothing to do with Qatar leaving OPEC. So relax, sit back with your coffee. Oil prices at the pumps are not likely to jump with Qatar’s exit. OPEC has left the building. Long live OPEC. RIP OPEC.

(The writer heads Bhambwani Securities Pvt Ltd and is the author of 'A Traders Guide to Indian Commodity Markets')

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Updated Date: Dec 04, 2018 10:38:19 IST