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After surviving through 60 years, OPEC confronts a precarious coronavirus oil future

Highlights

60th birthday party in Baghdad canceled due to virus

OPEC's been declared dead many times, but lives on

But COVID-19 may permanently change the market

London — In a more "normal" 2020, OPEC would be gathering in Baghdad to celebrate the organization's 60th birthday Sept. 14.

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But, like many events in 2020, the coronavirus pandemic interfered.

The oil producing bloc that has managed to keep meeting through wars between its members was forced to cancel the festivities — an inauspicious omen, perhaps, as the infection may present OPEC's biggest existential threat yet.

Global economies are struggling to adapt to the pandemic, with oil demand taking a potentially permanent hit. As well, many governments are seeing an opportunity to accelerate ambitious energy transition goals.

The 13 members of OPEC have teamed up with Russia and nine other allies to institute drastic production cuts, helping rescue prices from historic lows this spring to current levels of about $40/b. But beyond the current crisis, to thrive in the next decade, let alone survive another 60 years, OPEC will have to confront some painful realities.

"In times of crises like now, OPEC has proved that it is needed," said Facts Global Energy analyst Fereidun Fesharaki, noting that the market crash this year prodded US President Donald Trump to broker the OPEC-Russia production cuts in a demonstration of the bloc's importance.

"[But] the future is different," he added. FGE projects gasoline and diesel demand peaking in 2032.

"Beyond 2040, we may not need OPEC, but until then, yes, we need it and yes, it will survive," Fesharaki said.

OPEC, for its part, remains assured about its role in the energy market.

Having defied the many obituaries that have been written about it throughout its history, the organization maintains that oil will remain an integral fuel in the future and has decried efforts by environmentalists to shut in production, saying the world's poorer nations will suffer the most.

The organization is due to release its latest World Oil Outlook in October, incorporating its long-term post-pandemic forecasts.

"The challenges our planet faces require comprehensive solutions – no single energy source is a panacea – and the need to look for cleaner and more efficient technological solutions everywhere, across all available energies," OPEC Secretary General Mohammed Barkindo wrote in an op-ed for S&P Global Platts.

Common interests, competing aims

OPEC formed in 1960 with founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, following a five-day summit in Baghdad.

Irked by price cuts imposed by the "Seven Sisters" international oil companies operating in their countries, the organization sought to protect its members' financial interests through collective clout.

As its membership has swelled to as many as 15 countries across three continents, OPEC's mission has evolved to achieve what it considers a "fair price" for both producers and consumers. It has done this through a variety of mechanisms: fixing prices, setting price bands and coordinating production quotas and ceilings -- not always successfully.

It has also sometimes attempted to wield its oil production for political aims, most notably during the Arab oil embargo of the 1970s.

The organization's influence over the oil market made its ministerial meetings – now typically held twice yearly at the OPEC secretariat in Vienna – must-follow events, with hundreds of journalists in attendance.

At its peak, OPEC controlled more than half of the world's crude supply. But as more producing countries emerged, its market share waned to about one-third, forcing it into a sometimes-strained marriage with Russia and nine other countries since 2017 to retain clout.

With such a diverse membership and sometimes competing objectives, OPEC -- and now its OPEC+ alliance -- has often struggled to choose between the yin and yang of defending market share versus supporting prices, in recent years implementing production cuts with mixed compliance while keeping a wary eye on US shale competitors.

A future reckoning

That rivalry with US producers has largely defined the organization's existence for much of the last decade, even as it has downplayed it to avoid antitrust complaints.

US production had been on a seemingly inexorable rise until COVID-19, frustrating OPEC's efforts to bolster prices through its output cuts, as many members saw their budget deficits ballooning.

Even if it never attains its heights of early 2020 after the pandemic, the US shale patch will still be a force to be reckoned with and has changed OPEC dynamics forever, said Kamil al-Harami, a Kuwaiti independent oil analyst.

"In the past, it was OPEC with the real power and threat," he said. "Now, it is no more a threat to the US."

In the face of US competition, OPEC has looked east to Asia, with many of its core Middle East members making significant investments in refineries and petrochemical plants to serve that growing market.

The pandemic is already forcing a rethink of some of those plans, due to the uncertainty of oil demand recovery.

OPEC, however, has touted its low costs of crude production and vast reserves as a competitive advantage that will keep it pumping in a smaller peak demand market, while its more expensive rivals bow out.

Nevertheless, OPEC's future path has never been murkier.

COVID-19 may turn out to be just a hard cough in an oil market that has seen plenty of convulsions over OPEC's 60 years.

Should it prove to be a more long-term illness, OPEC may be running out of medicine.