Why OPEC may be Guyana's new best friend
Letter #13-5/3/21
Yesterday OPEC decided to keep in place through April the cuts it made to oil production as part of its response to the covid-19 crisis. The price of Brent crude subsequently surged towards $70 per barrel on the news - far above the lows of around $18 in April 2020 during the early days of the pandemic.
For those not familiar with OPEC, it stands for the Organisation of Petroleum Exporting Countries and was founded in 1960 by its first five members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela who wanted to get more for their oil reserves, which at the time were being extracted by Western companies. The original group looked therefore to coordinate supplies so as to keep world prices high. (The organisation has also served the role of keeping prices stable at times of global crisis, such as a war when supplies can be disrupted) Of course this did not go down well with Western consumer nations and it all came to a head with the 1973 oil embargo when the group, protesting US support for Israel in the Yom Kippur war, restricted supplies and embargoed certain Western countries. Already high at the time, oil prices doubled triggering a global recession. Incidentally Guyana was a casualty, suffering a foreign exchange crisis leading to restrictions on imports.
In the following decades there has not been as much unity within OPEC, in part because of internal political divisions and because many non-OPEC countries have found oil, meaning OPEC controls less of the market.
So seeing market share eroded by Russia and also by the US shale boom, early last year OPEC’s biggest and most influential producer, Saudi Arabia decided to teach everyone a hard lesson by opening their oil pipes and flooding the market. Prices quickly dropped by half. However, this also coincided with the first few weeks of the covid-19 storm which resulted in a drastic drop in demand as the world economy ground to a halt. Prices plummeted further to under $20 a barrel. A panicked OPEC quickly regrouped, and its thirteen members, plus a chastened Russia (hence OPEC Plus), agreed to emergency cuts of 9.7M B/D to balance the market. Prices stabilised through the summer and late 2020 rose steadily to around US$50 by year end while the cuts were later eased to 7.2M B/D in January.
Now that there appears to be light at the end of the covid-19 tunnel and demand is returning, most notably in China/Asia, prices have continued to climb reaching over $60 (Brent). Calls have been growing for OPEC to restore the cuts. However, yesterday it surprised some observers by keeping them in place at least through April. Instrumental in this move (or non-move) was Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman who is seen as a voice of calm and experience for the organisation. In justifying his position before yesterday’s meeting, he warned, “The uncertainty is very high and we have to be extremely cautious. The scars from the events last year should teach us caution.”
Not only that, he managed to get Russia to agree to keep the status quo, albeit with a 130K B/D increase. What has also been surprising through this crisis has been how compliant the members have been in keeping to their quotas and not cheating as in times past.
So what’s this got to do with Guyana? A LOT! There could not have been a more inauspicious time for the country to become an oil producer in late 2019/early 2020. Brent which is the benchmark for Guyana's sweet light crude (Liza) went from $69 in early January to $36 by March 9. So Guyana’s four lifts for 2020 averaged about $46 per barrel - $54 (January) $35 (April) $46 (July) and $49 (November). And because of the issues with the FPSO, Guyana also missed out on one of its shipments.
But as of today Brent is touching $70 per barrel and many analysts project a $70 to $80 price range for the rest of 2021 as the world economy rebounds strongly from covid-19 including the airline industry -a significant consumer of fossil fuels. Without counting the chickens before they hatch, Guyana is looking to reap significantly more this year. (De facto) Finance Minister Ashni Singh is also preaching caution predicting a price per barrel of $43.9 for 2021. That already looks out of date. What is also clear is that while there may be controversy over the government take in the contract, a far more significant factor is the price of oil.
Higher prices will help but more important especially for a country so reliant on oil exports (now 55% of total exports ) is stability. Stability gives governments the confidence to project revenues and plan accordingly. OPEC presently offers that stability and it may well be that after this covid-19 scare, the organisation will be more unified going forward especially as they contemplate a lower carbon future.