Brazil’s accession to OPEC+ will change the global oil market

But, on the other hand, Brazil announced its accession to OPEC+ from January 1, 2024. True, there are no quotas yet. Nevertheless, starting next year, the alliance will control not 46% of the global oil market, but 50%.

At the same time, the consequences of the Brazilian step will be felt not only by the hydrocarbon sphere, but also, more importantly, by the geopolitical architecture. The formation of a de facto union between BRICS and OPEC+ has been launched. On the one hand, a country that was one of the founders of BRICS entered the oil alliance. On the other hand, next year Saudi Arabia and the UAE will join the BRICS ranks.

However, before predicting the further strengthening of the global South in confrontation with the collective West, it is still necessary to understand the prospects of the world oil market.

They, in turn, are determined not only by the challenges of the future, but also by the results of relatively recent developments around the global balance of demand and supply of hydrocarbons. For the first 13 years of its existence, the organization of oil exporting countries (OPEC was established in 1960) did not play a decisive role in the world market. First, the US dominated production by a wide margin. Secondly, oil in third world countries was produced mainly by American and British companies. The situation unfolded, as we know, in the fall of 1973.

OPEC and, above all, Saudi Arabia are ahead of the United States in oil production. The nationalization of Western oil companies began. This made it possible for the Arabs, supported by Iran, to declare an oil embargo on Israel, the USA, the Netherlands and a number of other countries during the Yom Kippur War. Draconian production cuts were also introduced – 10% compared to the September 1973 level. As a result, prices quadrupled by December of the same year. An energy crisis began in the West, and then a general economic crisis. It was a victory for producers over consumers.

However, in subsequent years OPEC did not achieve such noticeable success. Global oil consumption has decreased. The USSR took advantage of the Arab victory and began selling large volumes of oil at lower prices.

Riyadh (not without pressure from the CIA) took revenge in 1986 by collapsing prices and thereby displacing our country in the global market.

The oil swing did not stop there. A sharp rise in prices has more than once given way to an equally significant drop. The penultimate time this happened was in 2015. Major oil producers, including Russia, a number of former Soviet republics and Saudi Arabia, finally came to their senses and created OPEC+ in 2016. Together we turned prices up.

The new association played the role of a lifeline during the pandemic. True, not right away. Initially, in March 2020, Russia and Saudi Arabia were unable to agree on production cuts. Prices, accordingly, collapsed by May to $14 per barrel. But in April, within the framework of OPEC+, they agreed to radically reduce oil production in May-June 2020 by 9.7 million bpd. Then production gradually increased, accelerating, not without pressure from Washington, in the spring and summer of 2022. The United States was not satisfied with the prices at that time, which reached $120 per barrel in March.

By September 2022, production cuts were reset to zero. But at this moment the price decline accelerated significantly. OPEC+ responded immediately. In October, production was increased to 100 thousand bpd to begin with. In November, they agreed to reduce production quotas by 2 million barrels per day in 2023. Of this figure, 1.1 million bpd was not a paper drop, but a physical drop in production. It didn’t help much. Prices went down again this spring. The Russian government in February warned of cutting crude oil production by 500,000 barrels per day starting in March. True, it is still not fully clear at what level this decrease was considered in the office of Deputy Prime Minister Alexander Novak, since since the beginning of the SVO, data on the dynamics of the oil and gas industry have been classified. It is only possible to evaluate the relevant indicators based on indirect data (for example, maritime exports). This is what Western analytical agencies and OPEC structures are doing. According to the International Energy Agency (IEA), in February, Russia produced 9.8–9.9 million barrels per day (the same figures were also given by Novak’s apparatus). But OPEC claimed that all 10 million. In addition, the IEA threw out information that supposedly Russia, having reduced production by only 200 thousand barrels in April-May, nevertheless increased oil exports.

But Russia’s nine OPEC+ allies (including Saudi Arabia, the UAE, and Kazakhstan) did not aggravate the situation, but, on the contrary, reduced production from May to the end of the year by 1.16 million barrels per day. On June 4, at a conference in Vienna, Riyadh voluntarily reduced oil production from July 1 by another 1 million barrels. Moscow, in turn, decided to cut off exports by 500 thousand barrels per day in August, and in September-November – by 300 thousand. In total, by the last OPEC+ meeting on November 30, physical reductions in oil production totaled 4.1 million barrels per day. Together with paper minus quotas – more than 5 million.

This led to a long-awaited supply shortage. Not very big. But according to different estimates – up to 1 million barrels per day. In the spring, the surplus reached 2–3 million barrels.

Therefore, in September, Brent rose to $95 per barrel, while in the spring oil fell to $71. But exporters did not celebrate their victory for long. In October, prices turned in the opposite direction, dropping to $77 at times.

There were two reasons for the reversal. Firstly, the Western media began to spread the word about Riyadh’s betrayal of the common cause. Emissaries from the Joe Biden administration allegedly persuaded Crown Prince Mohammed bin Salman to abandon the latest production cuts. In response, he was promised, on favorable terms, to facilitate the conclusion of the “Abraham Agreement” with Israel, which the UAE, Bahrain, Morocco and Sudan had already signed in 2020–2021.

Whether the Saudi prince was actually brought to such a life is not known, but after the Hamas attack on Israel on October 7, any agreements between Saudi Arabia and Israel should be forgotten for a long time. But oil prices fell.

Secondly, and more importantly, OPEC+ does not control the majority of the global oil market. Only OPEC – 28%, OPEC+ – 46%.

And while the alliance is reducing production, in countries that are not members of OPEC+, on the contrary, it is growing and, accordingly, their supplies are occupying the vacated niches. Thus, in the USA, production from September to November increased from 12.9 million bpd to a record 13.24 million. Growth was also noted in Canada and Norway.

In Brazil, in September, production increased by 6.1% compared to August, and by 16.7% compared to September 2022. According to estimates by the Brazilian Institute of Oil and Gas, the country has become the ninth largest producer in the world and the first in Latin America. The CEO of the Brazilian oil and gas company Petrobras, Jean-Paul Prates, believes that oil production in his country will increase in the near future by another 4-5%.

In such circumstances, decisions on new OPEC+ production cuts were made with the utmost caution. It is no coincidence that the negotiations in Vienna had to be postponed for several days. As a result, Saudi Arabia only confirmed the extension of the current cuts until 2024. Russia has added an export limit of 200 thousand barrels of petroleum products for the first quarter of next year. By the way, an interesting innovation from Novak. OPEC+ always cuts only production, not exports. And we first “squeezed” the export of crude oil, and now also diesel, the export of which is already limited.

Plus, several countries promised to reduce production by 700 thousand b/d. For example, Kazakhstan will remove 82 thousand b/d from the market in 2024.

It turns out that the market will be shortfall by more than 5 million bpd next year. Which will probably keep prices in the range of $75–80 per barrel. Not much, but enough for now. Moreover, the position of OPEC+ thanks to the accession of Brazil will be strengthened, since the alliance will capture half of the world market.

The position of BRICS will also strengthen due to the influx of Saudi Arabia and the UAE. An exciting prospect awaits the global oil market.