OPEC is losing ground on the world oil stage.
OPEC is losing ground on the world oil stage.

When OPEC sneezes, the entire global oil market catches a cold. That rule was apparent once again March 21, as oil prices took another downward turn after some weeks of progress. According to Reuters, this latest wave of activity in the oil market is most likely due to recent overtures from OPEC leadership that it may extend its ongoing production cut.

At face value, an extension of the ongoing freeze would only benefit OPEC nations, who instituted it primarily to control excessive production and drive revenue higher. However, the plan has achieved limited success since being made official at the end of 2016. Oil stockpiles around the world remain high, creating an incentive for lower prices and higher sales volume. Since the cut was made official, OPEC nations have indeed ramped down net output of crude oil, but it hasn’t been enough. Saudi Arabia was found to be responsible for the bulk of the decrease in output since the start of 2017, while other OPEC nations struggled to do so while still generating sufficient income.

The bigger problem, according to analysts, is the relative lack of cooperation from non-member nations, especially Russia. Reuters noted that sources within OPEC had been hinting that they were optimistic that the production cut would be extended and more nations would comply to a greater degree. The market, on the other hand, does not seem to believe it.

“We think it is very unlikely that Russia will actively take part in any extension of the production cuts that goes beyond paying lip service to the agreement,” Commerzbank said in a note to investors March 21. The bank added that it would be unwise for investors to “pin their hopes” on any extension actually coming true. In order to reduce oil stockpiles enough to allow a considerable improvement in prices, according to Commerzbank analysts, OPEC would need to extend its production cut through the end of 2017, and achieve a high degree of cooperation.

OPEC influence wanes

Further complicating the scenario for OPEC is the fact that the global import market was already working against its favor. As The Wall Street Journal reported, the U.S. and China, who used to be among OPEC’s biggest cash cows, have increasingly found other sources for their oil. The U.S., for instance, now gets the bulk of its imported oil from Canada, and less than a quarter from OPEC nations. The U.S. has also significantly bolstered its reliance on domestic production in the last 15 years.

The situation in China has changed much more quickly than in the U.S. In 2017, Russia is expected to overtake Saudi Arabia as China’s top oil supplier. As recently as 2012, Russia was not even among the nation’s top three sources of imported oil. China has also been sourcing much more oil from Iraq and Iran, both of which have maintained a tenuous relationship with OPEC leaders.

The net effect, in the words of The Journal, is that Saudi Arabia and OPEC in general has been losing its dominance of the worldwide oil landscape for more than a decade. This has put “extraordinary pressure” on Saudi leadership and influence both internally and externally, according to a source speaking with The Journal. The Saudi government and the services it provides to residents are funded primarily by oil sales. Therefore, a less bright outlook on the market’s prospects leaves the nation’s fiscal future uncertain.