Some three weeks back, on April 20 to be exact, the WTI hit a three-year high above $69 a barrel and Brent above $73 a barrel, prompting US President Donald Trump to blast the Organisation of Petroleum Exporting Countries (Opec). He underlined in very clear terms that this was not acceptable. “Looks like Opec is at it again,” he tweeted. “With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”

In the meantime, crude prices went even higher, crossing $80 per barrel (bbl) mark briefly last week.

With the US opting out of the Iran nuclear deal and Mike Pompeo threatening Tehran with ‘strongest sanctions in history’ geopolitics got into play too. Many analysts felt that as much as 1-1.2 million barrel per day (bpd) of Iranian crude could be taken off the market.

The emerging downward spiral of the Venezuelan crude output also emerged as a cause of real concern to the global energy balance. Venezuela has seen its production drop steadily, from 2.3m bpd in January 2016, to 1.6m bpd in January 2018. Maduro’s electoral win last weekend only adds to the problems.

Meanwhile, bad weather in Libya has also taken off the markets at least 120,000 bpd of crude. Production curtailments started as early as May 17 as oilfield equipment stopped working. All these worsened the market woes. But the prices continued to rise.

However, things changed. Despite earlier hints that the Opec kingpin Saudi Arabia was targeting a price of $80 per bbl or even more — to ensure a better return from the long-anticipated Aramco IPO and to close it budgetary gap — political compulsions seem to have forced Opec to withdraw its bid.

The stated objective to tighten crude markets seems to have been pushed to sidelines – at least for the time being, and for obvious reasons. As major Opec players are keen to get Washington, politically and strategically, on their side, and at any cost, the Gulf Arab oil-rich states cannot risk the fury of President Trump.

Ahead of the American withdrawal from the Iranian nuclear deal, Trump administration had reportedly asked major oil producers, including Saudi Arabia to step in to alleviate any market shortage and price spikes – stemming from a drop in Iranian exports. Opec had no choice — but to honour it — for political reasons.

All out efforts thus seem on to douse the fire ravaging the crude oil markets.

With expectations now building that the Opec could wind down the output deal in place since the start of 2017, crude markets lost the steam, dropping by $3 per barrel on Friday. Worries about the rising US crude inventories also aided extending the downturn.

Crude markets are caving in. Worries about US crude inventories helped extend the US benchmark’s downturn, hitting the lowest finish in about two weeks. Earlier on Wednesday, the US Energy Information Adminis­tration had reported that the US commercial crude inventories surged by 5.8m barrels in the week through May 18.

As the week unfolded, it became apparent that the Opec is in a firefighting mode. In sharp contrast to its earlier stance, it was attempting to cool down the markets.

Opec may decide to raise oil output as soon as June after Washington raised concerns, apparently in private too, that the oil rally was going too far, Opec and oil industry sources familiar with the discussions told Reuters.

When Brent touched $80 a barrel, crude diplomacy went into overdrive. Saudi Energy Minister Khalid al-Falih spoke to a number of fellow ministers, including those of the UAE, USA, Russia, India, and Korea, “to coordinate global action to ease oil market anxiety.”

“I also talked to the Executive Director of #IEA to reassure him of our commitment to the stability of oil markets and the global economy,” al-Falih said in a follow-up tweet.

Meanwhile, the International Energy Agency, the Organisation for Economic Cooperaton and Development (OECD) energy watchdog, also indicated it was ready to act if “necessary to ensure that markets remain well supplied.”

Following this diplomatic flurry, Russia and Saudi Arabia indicated they would discuss ways to control the crude price spike. Energy ministers of Russia and Saudi Arabia met in St. Petersburg on Friday, along with their counterpart from the United Arab Emirates and discussed an output increase of about 1m bpd, sources told Reuters.

Russia’s energy minister later said oil ministers from Opec states and non-Opec countries participating in a deal to cut output would likely decide to gradually ease curbs at their June meeting in Vienna.

Opec has its own political compulsions. It cannot afford crossing red lines — for obvious political considerations. And this is getting apparent now.

Published in Dawn, May 27th, 2018