Monday’s announcement by Qatar that it is leaving OPEC does not spell the end of that organization, or really do it much harm, despite some of the fright pieces coming from the energy-related news media today.
Qatar has not really been a major player within OPEC, a reality that has caused its leaders a good deal of frustration, which is likely part of the reason for this week’s sudden decision. Qatar is also not one of the larger producers in the organization, ranking as its 9th-largest producer per the most recent data available.
Saad Al Kaabi, Qatar’s minister of energy, said his country made the decision to depart from OPEC so that it can focus more attention to continuing to grow its already massive LNG export business. That makes sense, given that the country’s future is tied far more to its natural gas reserves than to its crude oil assets.
Far from damaging OPEC, a strong case can be made that the cartel has never been stronger or more effective in its efforts to control exports and prices. Thanks mainly to its so-called “OPEC+” alliance with Russia, Mexico and other non-OPEC countries, the group was largely successful in strengthening crude prices up until October, when Saudi Arabia and Russia mis-read and oversupplied the market as the U.S. reimposed sanctions on Iran.
The Brent price dropped by more than 30% during October and November as a result, but has become to stage a comeback this week as the Saudis and Russians scale back their exports and the markets begin to anticipate further cuts from the other OPEC+ nations when the group holds its annual meeting late this week, when a new set of production/export quotas will be established for the first half of 2019.
Make no mistake about it: it is important to everyone in the U.S. industry that the group agree to further cuts. With the market already pricing lower export levels into crude prices, a failure to agree to lower export levels in the coming months would send the price for West Texas Intermediate, currently trading at around $53/bbl, down into the $40s.
That’s a scenario no one can afford.